The markets started the month strong but took a breather before it was all over. At mid-month the Dow was up a little less than 1%, but on October 19, the Dow lost 205 points or 1.5%. That day also happened to be the 25th anniversary of the October 1987 "Black Monday" crash. Another 242-point selloff on the 23rd was enough to send most investors to the sideline until after the jobs report and Election Day.
Also weighing on the indices, Apple's stock continued the correction it started in mid-September, dropping over 3% on Friday close at around $575, down almost 20% from its peak at just over $700.
To put things in perspective, on October 19, 1987 the Dow opened at 2,248 and closed at 1,738, giving up 510 points or almost 23%, which is still the largest, one-day percentage drop for the index. The estimated market loss was $500 billion and 604 million shares were traded that day. On August 25, the Dow stood at 2,722, making the drop to the October 19 low a total of 36%.
The Dow started 1987 at 1,927 and finished the year at 1,939, making the big drop a huge buying opportunity in retrospect. In order to match the 1987 drop on October 19th of this year, the Dow, after opening at 13,344 would have had to drop more than 3,000 points, back to around 10,300.
Friday's jobs report did little to improve the market's mood. The initial response was positive, but that quickly gave way to selling pressure that resulted in a 1% decline for the day by the time it was all over. The economy added 171,000 jobs in September and the prior two months estimates were revised higher by a total of 84,000 jobs.
The unemployment rate ticked higher from 7.8% to 7.9%, due mostly to the return to the labor force of 578,000 workers. In my opinion, this is a more-encouraging number than the jobs created. Even though we need an economy that creates over 250,000 jobs per month for an extended period to get us to pre-recession employment levels, a rising unemployment rate due to folks returning to the workforce is a good thing. Conversely, a falling unemployment rate due to hundreds of thousands leave the workforce is bad.
Employment growth has averaged 157,000 per month in 2012, which is a little higher than the 2001 monthly average of 153,000. Again, this is just barely above the level required to keep pace with population growth. Another growing problem is the long-term unemployed. Nearly 41% of the unemployed have been out of work for over 6 months.
A few highlights and lowlights are worth mentioning from elsewhere in all the economic data. Consumer confidence rose to 72.2 in October, which is the highest level since February 2008. Pending home sales edged higher in September and new home sales increased by almost 6%. Third-quarter GDP estimates indicate 2% growth which was above estimates. Consumer spending has the biggest impact on GDP and it also rose 2%, compared to an increase of 1.5% in the second quarter.
Durable goods orders increased, consumers spent more, businesses spent less, and inflation crept higher while disposable income declined. As one should expect, the savings rate fell as consumers raided their bank accounts and piggy banks to make up for the shortfall blamed mostly on rising gas and food costs.
As with other big storms, Hurricane Sandy will have immediate and longer-lasting influences on the economy. In the near term, economic activity grinds to a halt and unemployment rises a bit due to businesses and commerce being shut down in the storm's immediate aftermath.
Once the cleanup and rebuilding efforts get underway, there will be lots of jobs available for many months to come. Unemployed construction workers will flock to the region and we'll see a mini boom of sorts. Raw materials will be in high demand and short supply, and hotels, motels, restaurants, stores, gas stations and all sorts of leisure and entertainment businesses will see a sharp recovery in support of all the transient workers. There is even some danger of localized inflation if not outright price gouging as basic supplies become scarce before things return to normal.
Without getting political, I find myself in the unusual position of not having much else upon which to opine. I'll reiterate that the outcome of the elections is likely to have a short-term impact on the markets, as will the actions, if any, of the lame-duck congress.
If the elections result in a balance of power that indicates two more years of political gridlock and inaction, I don't believe the markets will respond positively for quite some time. Dragging out the US's economic recovery, or worse, allowing a fiscal cliff situation to send us back into recession will hurt us here at home and will certainly not help matters in Europe, or anywhere else for that matter.
In summary I'm saying we're not out of the woods yet. The way we position our clients' portfolios for the immediate future and the next couple of years could range anywhere from bullish on equities and growth to bearish, if not completely defensive, but you can rest assured it will depend quite heavily on the outcome of Tuesday's elections.
If you haven't voted yet, you should. If you don't vote, don't complain. Oh...and please have a wonderful Thanksgiving!
