October rallied sharply in the first day of trading, but then drifted back. Optimists took over at mid-month and started a good rally that brought major stock indices to nice month-end gains. Economic reports still show a snail-paced recovery, although the housing market continued to be a bright spot. Corporate profits showed surprising gains in October, and much of the concern regarding the war with Iraq did not faze stock market investors. The FOMC did not meet in October. A number of weak economic reports towards the end of the month had market players talking about another possible rate cut. Federal Reserve officials mentioned the weak economy, but most indicated that current policy is quite accommodative.
The month of October began with a strong rally on October 1st as tensions with Iraq dwindled and corporate profits looked strong. The following eight days were a different story, as weak economic reports and corporate warnings dented any hopes for a strong rally. During the middle of the month corporate profits looked healthy again and carried equities for a strong week-long rally. The Dow rose back above the 8,000 mark on the 15th of October and held above the level for the rest of the month. Strong corporate profits were a nice surprise for market players used to weak ones. The 15th was also the strongest one-day performance in the month, though it was followed by the month's weakest performance on the 16th. Major indices finished the month higher as positive days outweighed negative days.
The high and low levels for the month are highlighted in blue.
Stock prices in the technology sector showed limited gains throughout the month. But telecommunications stocks, hurt by weak profits, continue to recede. The retail sector was slightly down for the month, as cold weather and a lack of enthusiasm kept cautious consumers at home. Energy stocks traded well for most of the month, but did lose some recent gains as the end of October brought unexpected declines in oil prices. Health care stocks declined throughout the month as this embattled sector has shown positive news only once in the past five months. Housing-related stocks regained losses in September after economic reports showed no slowdown in the market. Financial stocks once again experienced nice gains. Travel and leisure stocks suffered on deep cracks in airlines and a slowdown in car sales.
The high and low levels for the month are highlighted in blue.
Looking at the performance of major indices week-by-week, three of the four full trading weeks of October were stronger than the previous week. The best performances -- Oct 1st, 10th, 11th, 15th, 17th, and 21st -- benefited from strong earnings in technology, financial, and consumer goods. The Dow closed on Oct. 21st at over 8,500 points and, unlike past months, held onto the gains, giving back only 100 points by month's end. Worries of Dow 7,000 are forgotten, as October's performance offered a little room for optimism. The Dow closed with a 10.6 percent gain, with the NASDAQ's increase reaching 13.5 percent. The Russell 2000 gained 3.1 percent. The S&P 500 finished up 8.6 percent for October. The market-encompassing Wilshire 5000 index posted a 7.5 percent increase.
Treasury Markets:
Stepping Back
The Treasury market continued to move in the opposite direction from equity markets. Treasuries began the month by rallying in line with the month's early reversal in the stock market. By mid-month, however, this situation had changed as equities rallied. Economic reports, particularly those towards the end of the month, showed a weakening economy and raised questions whether the Fed would lower interest rates at the next Fed meeting. Weak labor markets, dropping consumer confidence, more contraction in the manufacturing sector, unexpected losses in durable goods, and a retail sales slowdown all helped Treasury investors in October.
But Treasuries were mixed through the month. With no FOMC meeting in October, market players were left to speculate on a possible easing of interest rates at the November FOMC meeting, especially considering the late string of weak economic reports.
As seen in the chart above, yields were mostly up from September's historical lows. Mid-month saw drastic declines from the end of the previous month, but the Treasury market rallied towards the close of the month, particularly in the short end of the yield curve. The 30-year bond traded poorly throughout the month, adding 31 basis points to its yield. The 10-year note increased by 29 basis points for the month of October, while the 5-year note gained 16 basis points. The 2-year note was able to lose 1 basis point from its yield by the end of October. The 3-month bill outperformed the rest, closing with a 12-basis point decline in its yield.
Damir Fonovich, Economist, Econoday
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