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US election dampens world markets in October

17 November 2016

US election dampens world markets in October

Despite its baleful reputation for stock market downturns over the years, October is usually a pretty good month for stocks: between 1950 and 2015, there have been 41 Octobers that delivered a rise in the S&P 500 index, and 25 when the market fell, yielding an average return of 0.8 per cent.

But as the election uncertainty ratcheted up in the US in October 2016, investors made it down 26 years for the month, with the S&P 500 index losing 1.8 per cent (to be up 5.9 per cent for 2016).

The Dow Jones Industrial Average (DJIA) shed 0.8 per cent for the month, to be up 6.4 per cent for 2016, while the technology-heavy Nasdaq Composite Index surrendered 2.3 per cent in October (to be up 4.7 per cent for 2016). For the Dow and the S&P 500, it was the third straight monthly loss, while the Nasdaq snapped a three-month winning streak – led lower by Apple, which reported its first annual revenue decline in 15 years.

The tightening of the presidential race, and the late-month new developments in the Federal Bureau of Investigation (FBI) probe into Hillary Clinton’s emails, seemingly pushed more cautious investors into cash and tipped the US indices to an October fall. As could only be expected in the lead-up to a bitterly contested US presidential election, the political news flow resulted in a market environment that gyrated between risk-on and risk-off.

US economy on the improve

The political uncertainty over-shadowed the trend of improving US economic figures. The US economy grew a stronger-than-expected 2.9 per cent in the third quarter, according to Commerce Department data. Consumer spending, which accounts for about 70 per cent of US economic activity, rose more than expected in September, increasing by 0.5 per cent, after a downwardly revised 0.1 per cent drop in August.

The September figure – which was driven by motor vehicle spending – represented the fastest rate in three months. Inflation as measured by the PCE index (favoured by the Federal Reserve) rose by 0.2 per cent. Markets also grappled with the increasing likelihood of a December US interest rate hike, while third-quarter earnings season was considered to have started reasonably well.

Services driving growth in China

Over in the world’s number two economy – and well away from the US political turmoil – three separate surveys late in the month heartened investors hoping to see the Chinese economy recover. The official manufacturing Purchasing Managers' Index (PMI), which measures large state-owned factories, came in at 51.2 for October, ahead of economists’ estimates and ending two months of flat readings. A figure above 50 suggests expansionary activity, while sub-50 levels indicate contraction.

Meanwhile, the Caixin manufacturing PMI – which covers mid-sized Chinese companies not included in the official survey – rose to 51.2 in October, the fastest pace of improvement since March 2011, on the back of stronger order growth.

Lastly, the government's official services PMI rose to 54.0 in October, from 53.7 in September and 53.5 in August. Services now represents more than half of the Chinese economy and the sector, which includes real estate, restaurants, and e-commerce, is showing steady growth in activity. On the other hand, manufacturing's contribution to overall growth is declining, as Beijing works to move its economic base from industry to consumption. Manufacturing now makes up about 40 per cent of China’s gross domestic product (GDP). China’s third quarter GDP growth came in at an annualised rate of 6.7 per cent, which was in line with forecasts.

Also in Asia, the Bank of Japan’s commitment to keep in place ultra-loose monetary policy until Japan has met its 2 per cent inflation target – and its expectations of ‘moderate’ growth – helped the stock market, as did the yen’s weakness versus the US Dollar. 

The Nikkei index in Tokyo added 5.9 per cent for the month (to trim its year-to-date loss to 8.5 per cent) while the Shanghai Composite index gained 3.2 per cent, leaving it still down 12.4 per cent for 2016. In Hong Kong the Hang Seng Index dropped 1.4 per cent in October, to be up 8.6 per cent in 2016.  

Politics also the concern in Europe

In Europe, the UK’s Brexit decision continued to cause political concern, as did the looming (4 December) Italian referendum vote on constitutional changes, that has come to be seen as a personal vote of confidence in Prime Minister Matteo Renzi and his government, and even a potential precursor to an ‘Itexit’. But on the economic front, Eurozone GDP rose by 0.3 per cent in the third quarter, and October’s Composite PMI rose to its highest level this year, indicating that there is real economic momentum in the Eurozone, despite the political worries. In addition, Europe’s economic sentiment index rose to 106.3, the highest level since the start of the year.

After reaching a four-month high in September, the Stoxx Europe 600 index eased 1.2 per cent lower in October. The CAC-40 in Paris rose 1.5 per cent for the month (up 0.7 per cent in 2016), the German DAX matched its French counterpart (but is down 0.7 per cent for the year so far). In London the FTSE 100 gained 1 per cent in October, to stretch its 2016 gain to 15.3 per cent.

In Australia, yield stocks were sold off in October, as bond yields rose around the world, taking the S&P/ASX 200 index to a 2.2 per cent loss in October, but it remains 4 per cent in the black for 2016. The Australian index was buttressed by stellar runs by resources heavyweights – in particular, Whitehaven Coal and Fortescue Metals Group – responding to resurgent commodity prices, especially coal. 

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