Equity Markets Recover in October

Equity markets have recovered in October after a steep correction in the third quarter. The S&P 500 fell approximately 7% in the third quarter due to uncertainty over the Federal Reserve and the path of interest rates, fears of an economic slowdown in China and an expected weak corporate earnings season.

Through the month of October, however, those fears have subsided at least temporarily. The S&P 500 has gained approximately 8% since October 1 and the RDM Capital composite of large-cap value equity-oriented portfolios has gained approximately 9%. The reasons for this recovery are the following:

• Markets have become comfortable with a December or early 2016 timeframe for an interest rate hike so long as it is followed by continued accommodative monetary policy for the medium-long term.
• Concerns over China have subsided somewhat as the Chinese central bank has lowered interest rates and equity market volatility in China has fallen.
• Corporate earnings have largely been higher than expected for the third quarter.

We expect any further market gains in the near term to be due to positive developments in two areas of uncertainty: commodity prices and interest rates. Despite a spring bounce in the price of crude oil, the commodity has weakened over the summer and early fall, in part due to fears over a Chinese economic slowdown. With crude oil near its lows since the pullback that began last year, we feel there is more upside than downside in energy markets going forward. Any recovery in energy prices would be well received by equity markets.

Additionally, with the Fed apparently nearing a decision to raise interest rates for the first time since the financial crisis, a major cause of market uncertainty could finally be put to rest. While we believe that a 0.25% rise in the Fed Funds rate would have little to no direct economic impact (positively or negatively), it could signal the Fed’s confidence in the economic recovery and therefore bolster investor and consumer confidence. Simply removing the uncertainty as to the timing of the first interest rate hike, in and of itself, would be a positive for equities. Increased investor confidence and lower market uncertainty would, indirectly, benefit the economy as a whole.