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Equities across the board took a hit in October as strong earnings and continued positive economic data did nothing to quell the downward pressure. International stocks fared no better, and most bond indexes also were negative as interest rates ticked upward. On October 3rd, Fed Chairman Powell stated that the U.S. is experiencing “a remarkably positive set of economic circumstances” and suggested that the Fed would continue to gradually raise interest rates. This “threat” of higher interest rates coupled with election uncertainty were enough to give the markets another October swoon.

There are times – and this was one of them – when the market direction diametrically opposes economic and earnings data. Other factors come into play and provide a sense of nervousness which causes short-term market tension. Plus, the market had reached an all- time high in late September which added to traders’ anxiety. However, the economy continues to exhibit healthy growth as 3rd quarter earnings were up better than 20% for the third consecutive quarter. Market pullbacks, in the face of a strong economic data and earnings, tend to be short-lived. From the high in early October to its late month low, the S&P 500 dropped 11.4% and finished the month down about 7%.

Employment growth continues to be robust with payrolls averaging just over 200,000 net new jobs per month in 2018. The latest unemployment rate was at 3.7%, showing that many workers are re-entering the workforce. The manufacturing sector has seen above-trend gains.

Market volatility (though not like we had in October) likely will continue as the market seeks to strike a balance between stronger economic growth and the unknown effects of potential higher interest rates and inflation. Interestingly, over the past 18 mid-term elections going back to 1946, the equity markets have averaged 16% gains during the 12 months following the elections regardless of the outcomes.

Even as the markets face heightened volatility, fundamentals for U.S. companies remain strong. With the sell-off, equity prices have not kept up with earnings growth, leaving stocks at more attractive valuations. The S&P 500 now trades below 16x forward earnings. Balance sheets are strong, dividends are increasing, and earnings growth is at an all-time high. As long as these fundamentals remain in place, equities should move higher and pullbacks should be short-lived.

Best Regards, Clay

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