Back in the Black

After a summer of slumps and declines, the stock market roared back to life in October, posting a three-week rally that saw the Dow Jones Industrial Average closing at 17,646.70 on Oct. 23 – up 157.54 points. This rally helped wipe out the losses the S&P 500 incurred in the months prior. Good news indeed for individual investors and market analysts alike who had begun to wonder if the market was on a downward trajectory.

Summer gave investors a lesson in hanging tough. After six months of choppy performance, the S&P dropped 12 percent from mid-July to its low point in late August. Worries about a possible decline in corporate profits in the United States, plus growing pessimism about the weakening Chinese economy helped to keep the stock market in the doldrums. Disappointing economic news from Europe and Japan also served to cast a shadow over Wall Street during the summer when investment experts wondered if this downturn, the first in four years, would lead us into a disappointing earnings season.

The bull market proved, as we entered the fourth quarter of 2015, that news of its demise had been greatly exaggerated. The S&P 500 closed the third week of October at 2,075.15 to bring the index back to the numbers it posted in January 2015. What’s behind the rebound? It’s often difficult to find logical cause and effect in the world’s markets, but experts point to some factors that are shaping this rally.

• Of the many factors – including geopolitics, interest rates and exchange rates – that can affect the market, earnings performance remains a key consideration for many investors. The upcoming corporate earnings season suddenly has begun to look a lot rosier than originally expected, with technology leaders like Amazon and Google posting profit levels that exceeded expectations. Airlines are seeing revenues and profits soar thanks to declining oil prices.
• The Federal Reserve’s September decision to hold off raising interest rates also proved to be a reassuring sign to investors nervous about the possible impact of gradual increases on the U.S. economy. The Fed’s policy has kept key interest rates at about zero for seven years, and economists speculate that they’ll stay that way for at least a little longer.
• The Fed is not the only central bank to take an active role in helping spur economic growth. The Chinese central bank announced further benchmark interest rate cuts for loans and deposits in mid-October. This move is credited with offsetting some investors’ concerns about how China’s slowing economy might affect U.S. trade and economic growth. European central banks are following a similar monetary policy.
• Of course, there is a downside to offset some of the good news. Declining oil prices are good for certain industry sectors, but sharp decreases have taken their toll on energy companies’ earnings and the many large engineering and technology corporations whose profits are closely aligned with those of their oil company clients.
• A global slump in commodities, as well as an abrupt end to China’s booming demand for energy and raw materials, has caused downturns for farmers as well as steel works, mining companies and manufacturers of heavy equipment in the United States and worldwide. Economists believe the commodity slump is bottoming out, but many predict depressed oil prices will be with us for some time.

The commentary above is intended to be general in nature. It is not intended to be a substitute for professional advice from a tax and investment expert.

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