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The Rally Continues

Markets extended their post-deal rally for another week, putting up several new records: The S&P 500 closed out the week at another all-time high, while the Nasdaq ended at a 13-year high. No records yet for the Dow, but it’s putting up a good fight, gaining 5.4% over the last 13 trading sessions. For the week, the S&P 500 gained 0.88%, the Dow increased 1.11%, and the Nasdaq grew 0.74%.[1]

After a delay of several weeks, investors finally got a look at September’s jobs report and the news was mixed. While the unemployment rate dropped to 7.2%, hiring appears to have slowed. Employers added just 148,000 new jobs in September, well below the 180,000 that economists had expected.[2]

On a more positive note, third quarter earnings have been slightly better than expected with earnings growth averaging 6.8% among the 243 S&P 500 companies that have already reported in. So far, 68% have beaten earnings estimates and 54% have beaten revenue estimates, trends that are above the historical averages. However, with the price-to-earnings ratio (a broad measure of the value of stocks) of the S&P 500 currently above its long-term average, some analysts are debating how much higher the market can go if the pace of earnings growth doesn’t pick up.[3]

Weak economic data means that the Federal Reserve is unlikely to make any changes to its policy of quantitative easing at this week’s FOMC meeting. Instead, they’ll pore over the economic data to see how badly Washington’s battles have hurt the U.S. economy. Consumer and business confidence may suffer lasting harm after the shutdown, especially as the current deal only postpones the fight until the New Year. Making matters worse, the shutdown interrupted regular data-gathering and analysis functions, muddying the economic picture for Fed policymakers. Some analysts believe that they could stand pat the rest of the year, delaying a taper until March, after the next round of fiscal debates and the new Fed Chairman takes over.[4]

Investors may be in for choppy waters this week as analysts struggle to parse economic data that’s muddled by seasonal factors as well as disruption caused by the government shutdown. Earnings will also be front and center as nearly a quarter of S&P 500 companies are due to report, including heavy hitters like Apple (AAPL), General Motors (GM), and Exxon (XOM.) While no major action is expected out of the two-day Fed FOMC meeting, a surprise could cause additional market volatility.

As always, if you have any questions about how recent events may affect your investments, please reach out, we’d be delighted to speak with you.

ECONOMIC CALENDAR
Monday: Industrial Production, Pending Home Sales Index, Dallas Fed Mfg. Survey
Tuesday: Producer Price Index, Retail Sales, S&P Case-Shiller HPI, Business Inventories, Consumer Confidence
Wednesday: ADP Employment Report, Consumer Price Index, EIA Petroleum Status Report, 7-Yr Note Auction, FOMC Meeting Announcement
Thursday: Jobless Claims, Chicago PMI
Friday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index

Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov . International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

HEADLINES:

U.S. construction spending reaches 4½ year high. August construction spending increased 0.6%, the highest level since April 2009, largely because of a rise in public construction projects.[5]

Consumer sentiment drops after government shutdown. Sentiment among U.S. consumers dropped in October to its lowest level since the Fiscal Cliff days as Americans worried about congressional dysfunction. Consumers are also worried about how the budgetary impasse may have affected fourth-quarter growth.[6]

Wholesale inventories rose in August. Inventories rose 0.5% in August, the biggest jump since January, indicating that business experienced a robust summer shopping period. Inventory growth was boosted by increases in stocks of autos and professional equipment.[7]

UK economy grows at fastest pace since 2010. Britain’s economy picked up speed in the third quarter, growing 0.8%, driven by growth in the services sector and rising housing prices. The unexpected growth gives Britons hope that their economic recovery is picking up steam.[8]

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Diversification does not guarantee profit nor is it guaranteed to protect assets

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.

The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.

The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.

The Dow Jones Corporate Bond Index is a 96-bond index designed to represent the market performance, on a total-return basis, of investment-grade bonds issued by leading U.S. companies. Bonds are equally weighted by maturity cell, industry sector, and the overall index.

The S&P/Case-Shiller Home Price Indices are the leading measures of U.S. residential real estate prices, tracking changes in the value of residential real estate. The index is made up of measures of real estate prices in 20 cities and weighted to produce the index.

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[1] http://briefing.com/investor/markets/weekly-wrap/weekly-wrap-for-october-21-2013.htm

[2] http://www.forbes.com/sites/samanthasharf/2013/10/22/jobs-report-disappoints-u-s-economy-added-just-148k-jobs-in-september/

[3] http://www.cnbc.com/id/101145197

[4] http://www.reuters.com/article/2013/10/27/us-usa-fed-idUSBRE99Q02Y20131027

[5] http://www.cnbc.com/id/101128773

[6] http://www.reuters.com/article/2013/10/25/us-usa-economy-sentiment-idUSBRE99O0LU20131025

[7] http://www.reuters.com/article/2013/10/25/us-wholesale-inventories-idUSBRE99O0LX20131025

[8] http://www.reuters.com/article/2013/10/25/us-britain-economy-idUSBRE99O09H20131025

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