In a perhaps surprising development, U.S. equities rose sharply last week, with the S&P 500 Index gaining 3.3%, essentially erasing losses from the previous week. Investors were not intimidated by the horrific terrorist attacks in Paris, focusing instead on potential positives found in the October Federal Reserve minutes. The Fed deliberations seemed to strike a suitable balance between raising expectations for a December liftoff and maintaining a measured pace of rate hikes. With this, the concerns of market participants were assuaged enough to allow for selective risk-taking during the week.
Despite increased geopolitical risks and higher odds of Fed action in December, the U.S. economy appears to be weathering the storm. Well-known consumer companies from Home Depot, Wal-Mart, and Lowe’s to Keurig and Salesforce.com managed to post very positive earnings reports. In addition, U.S. leading economic indicators were up 0.6% in October, tied for the highest print of the year, and job reports continued to be strong.
The Paris attacks brought renewed focus on the Eurozone, where the Consumer Price Index (“CPI”) rose 0.1% in October year over year, while the core CPI (which excludes food and energy prices) rose 1.0%. The October meeting minutes of the European Central Bank (“ECB”) pointed to a likely expansion of the bank’s stimulus program in December. ECB President Mario Draghi said this week that the bank will do what it must to raise inflation as quickly as possible.
Investors have noticed that volatility has increased over the last several months, as the global economy remains uneven and several major economies have suffered growth setbacks along the way. As a result, global markets have relied on easy monetary policy rather than on organic growth to power risk assets, including equities, higher. Ultimately, the difference between the next secular (long-running) equity bull market and cyclical rallies within a secular bear market will be found in sustainable and higher global economic growth.