For a month with a spooky reputation, this October was a barn burner for investors. In fact, U.S. equities posted their strongest monthly gain in four years despite slipping lower on Friday in response to mixed earnings reports. Still, the Dow Jones industrials index climbed 8.5 percent for the month.
The catalyst for October's rise: Indications that the Federal Reserve will likely not raise interest rates for the first time since 2006.
The surge started on Oct. 2 after stocks rallied in response to a weaker-than-expected September payroll report. Just 142,000 jobs were created, well below the lowest analyst estimates and well under the consensus expectation of 203,000. Futures market odds of a December interest rate hike fell to 29 percent.
This ignited a surge of panic buying as investors had become, by some measures, the most pessimistically positioned since the financial crisis. The worst performers during the August-September market sell-off turned tail and led the way higher with big gains in areas like energy, industrials and materials.
The buying continued throughout the month as economic data -- from retail sales to core durable goods -- all suggested the U.S. economy was hitting a soft patch. On Thursday, we learned third-quarter GDP growth slowed to just a 1.5 percent seasonally adjusted annualized rate, below the 1.7 percent expected and well off the second quarter's 3.9 percent expansion.
According to Macroeconomic Advisers, fourth-quarter GDP growth is currently tracking at 2.2%. Much depends on the severity of winter weather this year.
Inflation has also been weak, undermining the Fed's stated requirement for confidence that price increases are set to return to its 2 percent target over the medium term before raising rates. On Friday, we learned the Fed's preferred inflation measure, the core Personal Consumption Expenditures price index, inched to a lower-than-expected 0.1 percent monthly change in September vs. the 0.2 percent expected and the 0.4 percent growth posted in August.
It's the same story with personal income, which got no help from flat wages and salaries in September. The Employment Cost Index, which measures labor costs for businesses, also turned lower, as shown above. That suggests more labor market slack, less negotiating power by employees and a slowdown in overall economic demand.
The start of the third-quarter earnings season also helped to keep investors buying as companies once again used diminished expectations, cost controls, share repurchases and accounting trickery to deliver positive surprises. According to FactSet, of the 340 companies in the S&P 500 that have reported results to date, 76 percent have reported earnings beats. This is above both the one-year (74 percent) and five-year averages (72 percent).
However, Friday's late selling revealed that some of the positive momentum might fade heading into November.
Overnight, the Bank of Japan surprised investors by leaving its existing bond-buying stimulus program unchanged. While U.S. equity futures climbed in response during early-morning trading, the decision cast a pall over the session because the BoJ also pushed back its anticipated time frame for achieving its 2 percent inflation goal into late 2016 or early 2017.
Also, the subdued trading on Thursday and Friday followed a surprisingly hawkish Federal Reserve policy statement on Wednesday, in which policymakers left open the possibility of a December interest rate hike. The move was unexpected by most analysts, pushing up the futures market odds of a December rate liftoff to 50-50 for the first time.
If the flow of U.S. economic data, starting with next Friday's October payroll report, turns positive, stocks could suffer again as investors realize that the Fed's long experiment with near-zero interest rates is less than two months away from ending.