October Update 2014

In our recent updates, we have talked about whether or not the stock market was getting too expensive and if we thought it was due for a correction. A lot of the data and charts suggested that the market is on the high side of its historical valuation so we concluded that the likelihood of a correction was higher than normal. We also have the psychological weakness that we often see in September & October as those 2 months are historically the weakest. Sure enough, we have seen a pretty strong pull back from the highs in the stock market. The S&P 500 dropped about 9% from it’s high in the low 2000’s to about 1825 but has since regained about half of that drop.

There were a number of issues that were weighing on the market and contributing to the pull back. These would include:

  • The Ebola Virus. We’re not experts here, but this situation seems to be under control, or at least getting there. This issue won’t go away completely until a vaccine or some other remedy is found but the market seems satisfied that we are on the right track.
  • The falling price of Oil. In most cases this should be seen as a positive as it makes the expense of gasoline & energy lower. However, when the price of oil goes down quickly due to recession fears, then investors get worried.
  • Weakening data from Europe & China. The economic data coming out of Europe & China has gotten weaker in recent months. This is the primary reason that the price of oil has dropped and it brings concerns that their weakness will result in weakness here in the US.
  • The Fed. As we have discussed in previous updates, The Federal Reserve has been gradually reducing their QE (Quantitative Easing, aka “money printing”) since the beginning of the year. This has been a concern because it could lead to higher interest rates. Those QE purchases were scheduled to end this month, but on Friday (Oct 17th) we had some hints that the Fed is thinking about continuing their QE program. James Bullard, president of the St Louis Fed said in an interview that the Fed should stop reducing their QE purchases. That helped to fuel some nice gains in the market and might be enough to mark the bottom of this downturn.

The Fed does not meet again until next week, but the market seems confident that they will keep rates where they are and probably stop reducing their QE purchases. The market likes to see the Fed doing what they can to try to keep interest rates low so this has been viewed as a positive. These things can change quickly but with the Fed on the side of keeping rates low, the stock market is likely to finish the year strong.