October is good to equities
October ended on a good note. The entire month was pretty positive. It was interesting to note, however, that the major stock indexes moved by quite a different magnitude over the month. Until recently, percent changes were similar across the board. In October, the NASDAQ composite index posted the largest monthly gain (13.5 percent) followed by the Dow Jones Industrials (10.6 percent).

The S&P 500 increased 8.6 percent during the month, but the Russell 2000 only rose 3.1 percent. This is a far cry from the trend posted earlier in the year when the Russell 2000 was the only index managing to post gains. The Russell was the only one of the major indexes to peak in April this year (the Dow and the S&P 500 peaked in March; the NASDAQ composite peaked in January). Even as this index, measuring small capitalization stocks, trended lower in May and June, it was still outperforming the large cap market. By July, this index also collapsed with the rest of the market. In October, its recovery was modest by comparison. Incidentally, the Russell 2000 posted the largest weekly gain this past week, so perhaps it is on its own road to recovery.

Treasury market rallies again
There is no question that Treasury market players have factored into the Treasury yield curve a 25 basis point rate reduction next week. Yields on both the 2-year note and the 3-month bill are roughly 25 basis points lower than a week ago. Market players were quick to buy on the sharp drop in consumer confidence reported on Tuesday. The index fell 14.3 percentage points to 79.4 and now stands at its lowest level since early 1994. It is unlikely that the Fed would consider dropping rates only on a decline in consumer confidence. However, the employment situation was anemic enough to justify market sentiment. Oddly enough, yields rose on Friday after the employment report - the yield curve was down on Thursday's set of economic news. Even though the employment data were not weak enough to hold down Treasury yields, they were weak enough to support arguments for a rate cut, which is the majority expectation among Wall Street economists.