This October, a good deal of daily market movement involved speculation regarding the possibility of further Federal Reserve rate reductions. Once again, the Fed moved to the beat of the market and met expectations with a quarter point reduction in both the discount window and federal funds rates. At 4.5%, the funds rate now stands at its lowest level since January of 2006. In a likely nod to on going credit uncertainties and unprecedented real estate declines, the cut was made in-spite of continued dollar weakness, record commodity prices, and a strong third quarter Gross Domestic Product (+3.9%).
Although it was a rocky month, the rate reductions together with end of month buying, the passage of quarterly reporting jitters, and the reemergence of merger and acquisition news, all of the broader indices managed to close positively. In fact, in a wide divergence, the NASDAQ 100 had its best monthly showing in nearly two years (+7%). Interestingly, it was Internet stocks that led these gains as semiconductors suffered badly. Similarly, in-spite of all of the recent international large-cap talk, small- and mid-cap growth stocks were the big winners this month.
We may get a rate induced end-of-year earnings multiple expansion after all; we will have to see if $100 oil or the Fed's hints that it may be done for now take an eventual toll -- Happy Halloween!
The Style Box below was calculated using the following PowerShares™ ETFs: PWT (Small-Growth), PWY (Small-Value), PWJ (Mid-Growth), PWP (Mid-Value), PWB (Large-Growth), and PWV (Large-Value).
The Standard & Poors 500, Dow Jones Industrial Average and NASDAQ 100 may be traded through ETF proxies, including the SPY or IVV, DIA and QQQQ, respectively.
Sentiment: Mixed to Positive
Volatility: Medium/Reduced (VIX 16-22)
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