2018 Year-End Rally Underway

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October and November have combined to give us quite a volatile time in the market. October 2018 was historically one of the roughest months. Since 1988 October 2018 was the 17th worst month out the 371 months, ranking it in the bottom 5% of all months. Also, October 2018 was the 2nd worst month out of the 31 Octobers since 1988, surpassed only by the financial crisis in 2008, placing it in the bottom 7% of all Octobers since 1988.

The following chart shows the historical average monthly total returns (blue bars) historically for the S&P 500 since 1988. October 2018 had a total return (orange bar) which hit historic marks among down months since 1988.

Historical Average Monthly Returns

Historical Average Monthly Returns Since 1988

For the month of November, the S&P 500 was up 2.0% on a total return basis, ranking it 150 best (40 percentile – upper middle of the pack) out of the 371 months since 1988. November was volatile and therefore did not have an easy path towards its above average return. The S&P 500 gained 3.8% between Nov. 1st and 7th, fell -6.4% between Nov. 8th and 23rd, and rallied 4.8% from the 24th to the 30th. That rally included the one-day gain of 2.3% on the 28th attributable to Federal Reserve Chairman Powell’s dovish speech at the NY Economic Club luncheon when he said the policy rate is now “just below” estimates of a level that neither brakes nor boosts a healthy economy, comments that many took as signaling the Fed’s three-year tightening cycle is drawing to a close.

We can see the volatile ride in November in the following chart of the S&P 500.

S&P 500 Large Cap Index

The S&P 500 volatile ride in November.

In early October the market was already discounting the FOMC’s future rate increases and as of the end November the market has now reduced them even further. Over the weekend it was reported that Trump and Xi Jinping reached a temporary truce in the trade war while meeting at the G-20 meetings. This has resulted in markets all over the world turning risk-on.

The below chart shows historical Federal Funds target rate (blue line), as well as FOMC dot plot expectations, which are the forecasts of the Fed Members (red line). It also shows the futures expectations for the Federal Funds rate as of October 11th (orange line) and November 30th (green line). From this we can glean that the market is reducing the future interest rate expectations.

Federal Funds Rate Expectations

FOMC and Market Expectations for the Federal Funds Rate.

The interest rate cycle may be ending, which would be beneficial for both the equity and fixed income markets, domestically and internationally. The trade wars have also been placed on pause. The table is set for a year-end rally, which would be welcomed by everyone after October and November’s wild ride.

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