October 2014 could best be described as the big rebound with the S&P500 initiating a strong rally mid month to post a return, as measured by the SPY exchange traded fund (etf) of 2.36% for the month, and a year to date total return of 10.71%. Indeed in mid-month the SPY was down 7.5% from mid-September. (Click Fund Tracking 20141031 Sheet1 for a rundown of monthly and YTD performance of select Exchange Traded Fund and Mutual Funds tracked by BIA.)
Much of the market decline and subsequent rally coincided with the up and down fears of Ebola in the United States. While Ebola my not pose a significant health risk in the U.S., it certainly still poses significant risks in countries that do not have the medical infrastructure to cope. In addition a widening outbreak could pose significant economic risk even in countries that are fortunate enough to successfully combat the virus itself.
In addition to Ebola, three economic themes drove the markets:
Falling Oil prices: Oil, as measured in West Texas Intermediary (WTI) prices, have declined from over $102 a barrel in late June to $80.50 at the end of October.
While certainly a positive for the economy as a whole, such a move does not come without wreaking havoc on some. Energy companies, via the etf XLE were off 3.53% for the month, with oil dependent nations were hurt as well. The Russian Index etf RSX was down 1.79% in October and is down 23.9 % was on the year. The Oil price is a major geopolitical storyline that bears watching into the future.
The end of Q/E : Well at least for now. At the end of the month Federal Reserve Chairman Janet Yellen announced that the Fed would indeed end purchases of treasury and mortgage backed bonds. This last round of “monetization” (known as QE 3) began in September 2012 with the purchase $40 billion of such securities a month, and was subsequently raised to $85 billion a month by the end of 2012. In September of 2013 the Fed began scaling back or “tapering” the purchases as a way to phase out of the program.
USA Today’s Paul Davidson, recently reported that “Although the conclusion of the purchases spells the end of a historic infusion of easy money in the financial markets, Fed policy makers have said it’s unlikely to sell most of the securities and will instead allow them to gradually come off the Fed’s books as they mature through the remainder of this decade. “
Bank of Japan replies with Good for Yee but not for Me: While the Fed announcement was widely anticipated, just two days later the Bank of Japan surprised global markets by doubling down on their own version of QE. As reported by the WSJ.Com “The BOJ will triple the pace of its buying of stock and property funds, extend the average maturity of its bondholding by three years to 10, and raise the ceiling of its annual Japanese government bond purchases by ¥30 trillion to ¥80 trillion.”
While not imposing a direct effect on the U.S, money printing in Japan is apt to continue to find its way to the U.S. Markets via the Yen Carry Trade.
DISCLAIMER: Nothing in this article should be construed as a personal recommendation or investment advice. Nor should anything in this article be construed as an offer, or a solicitation of an offer, to sell or buy any particular investment security. Investors should conduct their own due diligence and seek the advice of a financial and/or investment professional before making any investment decisions.