Third quarter performance of the general equity market was marked by calm markets followed by Federal Reserve driven‐volatility. Prior to the Federal Reserve beige book report in September, equity markets were quite calm, as measured by the CBOE VIX index (Chicago Board Options Exchange Volatility Index, a measure of expected market volatility over the next 30 days). On September 12th the VIX index spiked from under 12 to over 20. Equity markets pulled downward as uncertainty regarding Fed action entered the marketplace.
Uncertainty is typically not a friend of equity markets. Currently, it is centered on when, if and how central banks across the world will move interest rates. Looking ahead to the fourth quarter, in my opinion there are three potential short‐term market drivers. All three will alleviate some uncertainty throughout the quarter:
- Central Bank Action/Inaction
- Third quarter earnings/GDP
- U.S. Presidential Election
Outside the U.S., Central Banks are poised to keep interest rates at current levels, or lower, to support economic activity. The U.S. Federal Open Market Committee(FOMC) is set to meet on November 1‐2 and
December 13‐14 of 2016. A rise in interest rates in November, prior to the presidential election, is highly unlikely. However, a rise in December is a possibility if third quarter Gross Domestic Product (GDP) growth is strong.
Second quarter GDP growth was revised up on September 29th from 0.8% to 1.4%. Economists estimate the third quarter could grow at 3% or more, which would mark the fastest growth rate since third quarter 2014. Positive sentiment is driven by an indication of inventory investment and stronger business investment in software and research and development.
Market performance can be driven by who is elected on November 8th. A study by MFS Investment Management shows that in the short‐term markets historically perform better when the incumbent party wins. Again, markets prefer a known entity versus uncertainty.
Looking into the fourth quarter, third quarter market calm may give way to storminess as uncertainty takes center stage. Once these uncertainties are known, we will have a much better opportunity to assess market movement going forward.
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