Stock markets around the world continue their upward march.

October was another strong month for stocks. Both domestic and international stocks posted impressive gains.

  • At home, large- and mid-cap stocks had very similar returns of +2.33% and +2.26% respectively (S&P 500 and S&P 400 indices). Small-caps were up +0.95% (S&P 600).
  • Outside the United States, emerging-market stocks returned +3.51% and developed-market stocks +1.52% (MSCI Emerging Markets and EAFE indices).

Once again, market volatility was low — there wasn’t a single day that the S&P 500 moved up or down more than 1%. In the bond markets, yields closed almost where they began and the Bloomberg Barclays Aggregate index inched up +0.06%.

 

There were several factors driving domestic stocks. First, we continued to see positive news on the economic front: U.S. GDP growth for the third quarter was +3%, beating market expectations. Unemployment remains at historically low levels, and inflation remains subdued. Second, earnings season (the period when companies report their earnings for the prior quarter) got off to a solid start. Companies have been posting strong results across most sectors, with big tech firms leading the charge.   Finally, expectations about a tax-reform bill, including a cut in corporate taxes, increased. See this month’s sidebar for a more detailed look at the impact of tax reform. Political uncertainty might have been expected from the first indictments in the Mueller investigations. However, this did not spook markets in October.

Stocks abroad pushed higher in October, despite an increase in the value of the U.S. dollar of about 1%, which hurts the returns of oversees assets for U.S. investors. Contributing factors include:

  • Better than expected eurozone economic growth, with inflation slowing from an already low level.
  • The landslide victory of Shinzo Abe’s party in the Japanese parliamentary elections. Abe’s win ensures the continuation of “Abenomics,” which is credited with boosting the Japanese economy.

On the bond front, interest rates opened and closed the month almost unchanged. Interest rates spiked during the month as rumors circulated that the president would nominate a “hawk” to be Chair of the Federal Reserve. Later in the month, rates fell as the rumors instead were that Jerome Powell will be nominated. Powell is viewed as more of a “dove,” meaning less likely to be aggressive about raising interest rates.

What this means for you.

Stocks have higher expected growth than bonds over the long term, but also have higher risk. This month, we again saw strong stock returns.

If your portfolio has higher risk — whether you’re far from retiring or you’ve told us you have a high risk tolerance — it will have had a positive month. While emerging-markets stocks saw the highest returns this month, they’ll account for much less of your portfolio than international developed-market stocks and U.S. stocks.

If you’re closer to retirement or you’ve told us you have less tolerance for risk, you’ll hold a lower percentage of your portfolio in stocks. These portfolios will not have seen the returns of higher-risk portfolios.

It’s important to make sure we know about your situation and how you feel about risk. Please contact an advisor or log on to your account to share this information anytime.

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