It was a disappointing month for stocks in October as a late-month sell-off caused all three major U.S. indices to end the month in the red. The S&P 500 lost 0.91 percent in October while the Nasdaq Composite dropped 0.49 percent. The Dow Jones Industrial Average lagged its peers and dropped 1.26 percent to start the fourth quarter. Concerns about future growth prospects for large technology companies served as a headwind for stocks during the month.
Despite the poor results in October, we saw improving fundamentals to start earnings season. Per Bloomberg Intelligence, as of October 31, with roughly two thirds of companies having reported actual earnings, the average earnings growth rate for the S&P 500 in the third quarter was 7.4 percent. This is well above analyst estimates at the start of earnings season for a more modest 4.2 percent increase. Since fundamentals ultimately drive long-term market performance, this was an encouraging development for investors.
Technical factors were supportive as well for U.S stocks. All three major indices spent the entire month well above their respective 200-day moving averages. (The 200-day moving average is a widely tracked technical signal, as prolonged breaks above or below this level can indicate shifting investor sentiment for an index.) All three of these indices have spent the entire year above their respective trendlines, indicating continued investor support for U.S. stocks.
International stocks were hit even harder during the month. The MSCI EAFE Index fell 5.44 percent in October while the MSCI Emerging Markets Index dropped 4.32 percent. Technical factors were mixed for international stocks. The MSCI EAFE Index ended the month below its 200-day moving average, marking the first time the index has ended a month below trend in more than a year. The MSCI Emerging Markets Index, on the other hand, remained well above its trendline throughout the month.
