Despite extreme market volatility since August on fears that a Greek debt default could spark a credit shock, the S&P 500 is up more than 13% this month, and is on pace for its biggest monthly gain since October 1974.
Year-to-date, the best and worst performing asset classes have been within the volatile commodities space (with gold/silver, heating oil, and rice leading the pack; and cotton, lumber, and wheat lagging).
Recent market optimism has risen on the heels of:
- A mostly mixed to positive corporate earnings season.
- Some stronger than expected economic data, as the U.S. economy grew at its fastest pace in a year during 3Q – consumers and businesses stepped up spending, creating momentum that could carry into 4Q.
- A long-awaited agreement by European leaders to contain the region’s two-year debt crisis – Leaders decided to expand their regional bailout fund, meaning banks holding Greek debt agreed to take bigger losses.
However, investors remained concerned over the following:
- Fears about a global recession continue to loom, particularly on a weak outlook from the Federal Reserve, and some disappointing economic data fromChina- manufacturing sector shrank for the third month in a row.
- Federal Reserve continues to keep interest rates at near zero – the Fed funds rate remains unchanged at 0-0.25%,
- Federal Reserve is mulling over a fresh round of bond purchases (more Quantitative Easing) among other tools to ease financial conditions, despite inflation data heating up.
- The unemployment rate remains at a stubbornly high 9.1%, with employers showing hiring grounding to a halt.
- The European debt deal still needs details to be worked out before the region can show its ability to contain the crippling crisis.
- Extreme volatility in the currency markets – Optimism thatEuropestemmed a debt crisis sent the U.S. dollar falling against most other currencies. The euro reached hit a seven-week high against the dollar on 10/27, while the dollar continues to hit fresh all-time lows against the Japanese Yen. Meanwhile, the Swiss National Bank intervened to drive down the value of the franc by setting an exchange rate cap.