Happy Halloween!

Are you dressing up for Halloween today? According to the National Retail Federation, 67.4 percent of of us will be buying Halloween costumes this year. That's the highest percentage this survey has recorded in its 11-year history.

Even though many more kids dress up than adults, the amount spent breaks down as $1.4 billion on adult costumes and $1.1 billion on children's costumers. On top of that, Americans will also be spending $350 million on costumes for our pets.

All told, Americans are expected to spend $7.4 billion on Halloween this year, including $2.2 billion on candy alone. That breaks down to a total of $77.52 for the average person, up from $75.03 last year. Boo!

End of an Era

The Federal Reserve announced yesterday what many investors have been expecting: Its bond buying program will end this week, as October draws to a close. The third and presumably final round of quantitative easing had begun in September 2012, meaning it will have lasted for just over two years.

The end of QEIII is a signal that the Fed has confidence in this economy. Forecasters expect that third quarter GDP will grow at about 3 percent. At the same time, the end of the program is of concern to investors, since the asset purchases had been intended, in part, to prop up the stock market.

The ends to the earlier phases of the program reflected that. After the end of QEI in 2010, the S&P 500 fell 12 percent. And in 2011, three months after QEII concluded, the S&P 500 dropped 14 percent. Markets were fairly quiet yesterday, though, so it may be that this is a program whose time has come to a proper end.

Oil Keeps Dropping

One of the big financial stories of the year continues to be the drop in oil prices, with gasoline prices dropping alongside them. Oil prices have fallen 25 percent since June, and it's now trading at around $86 a barrel. It's been up above $100 a barrel for most of the last three years.

But it may be falling even further. Goldman Sachs is now predicting that oil prices will fall to $70 a barrel by the second quarter of 2015. To show how quickly things are changing, that forecast comes just three weeks after Goldman's last prediction for the price of oil.

That's why the national average for a gallon of gas is about to drop below three dollars a gallon; they currently sit at $3.03. The lowest average prices for gas comes in South Carolina, where they're paying just $2.78 a gallon. We're not far behind that here in New Jersey, where the average gallon of gas costs just $2.86.

The New High-Tech Era

Facebook recently issued some new stock to help pay for its acquisition of WhatsApp, an instant-messaging service. Facebook's share price didn't change much as a result, so the new issuance raised the social media giant's market cap to $224 billion. As the Wall Street Journal pointed out, that means that Facebook is now worth more than JP Morgan Chase. Not bad for a company that's barely ten years old.

JP Morgan isn't quite as dominant as it used to be; back in 2011, Wells Fargo passed it up as the bank with the largest market cap. In addition to Facebook, JP Morgan is now also smaller than Google and Microsoft. It may be that we are seeing the dawn of a new high-tech era, this one dominated by behemoths rather than the upstarts of the 1990s.

But all those companies are small compared to Apple. Despite some setbacks in recent months, Apple's market cap is still greater than JP Morgan and Wells Fargo - the two biggest banking stocks - combined.

Why Housing Is Coming Back

Home sales in September reached a new high-water mark for 2014, reaching an annual rate of 5.17 million homes sold, according to figures released last week by the National Association of Realtors. Median home prices are also up to $209,700, an increase of 5.6 percent from a year earlier.

Sales of previously existing homes were up 2.4 percent in September. Home sales actually peaked in the middle of 2013, at an annual rate of 5.38 million. While they haven't returned to that level, both figures are well above the recession-fueled low of 3.45 million in 2010.

One of the reasons for this year's resurgence has been the drop in mortgage rates. Last week, 30-year mortgage rates fell to 4.03 percent, down from 4.29 percent in September, and 4.63 percent at the beginning of the year. Thirty-year fixed rates are now at their lowest level since June 2013.

Mixed Signals on Earnings

Earnings season is just underway, with about 300 companies having reported their earnings thus far; that's about 15 percent of the reports we can expect this quarter. So far this season, 64.9 percent of companies have beaten the consensus analyst earnings estimates. That's a pretty strong figure, the highest we've seen since 2010.

But that's not the only way to look at things. Just 49.3 percent of companies have beaten their consensus estimates for revenue, which would be a weak figure for that metric. More than half of all reporting companies have beaten their revenue estimates in each of the past seven quarters.

Which is the more reliable measure? Investors would generally prefer to see revenue numbers come in stronger than earnings numbers, because revenue numbers - which simply measure sales rather than profits -  are more difficult for companies to fiddle with. But so far this earnings season, the opposite has occurred.

Good News for Retirees

If you're retired, you'll see a little bump in your income next year. The Social Security Administration announced Wednesday that people receiving Social Security will get a cost-of-living adjustment of 1.7 percent for 2015. That reflects the modest increase in inflation over the past year.

The 1.7 percent is consistent with the increase we've seen in the past few years. The Social Security adjustment was 1.5 percent for 2014, and 1.7 percent for 2013. But in 2010 and 2011, as the economy struggled to emerge from the recession, there was no cost-of-living adjustment at all.

On the other hand, when the economy is stronger, retirees generally get more of a bump than this. In every year from 2004 to 2009, the adjustment was higher than this year's 1.7 percent - including a high of 5.8 percent in 2009.

Tough Times for Big Names

Earnings season is underway again, and there has been some very rough news for some of America's most venerable and best-known brands. Reporting this week:

• Coca-Cola announced yesterday that its quarterly global soda sales increased by just 1 percent in the third quarter. Coke's shares lost 6 percent on the news, the stock's biggest one-day drop in six years.
• McDonald's reported that same-store sales dropped by 3.3 percent in the third quarter. Within the U.S., same-store sales fell by 4.1 percent in September alone - the worst domestic month for the Golden Arches since February 2003.
• On Monday, IBM reported that its revenues in the third quarter dropped by 4 percent, and profits dropped by almost half, to just $18 million for the quarter. It was the tenth straight quarter that Big Blue's sales were flat or declining.

Bulls Hanging In There

The volatility that the market has been experiencing lately often signals that stocks are headed for a downturn. But investors have not been reacting that way. In fact, optimism still carries the day, despite the recent losses of the S&P 500 and the Dow Jones.

The American Association of Individual Investors actually saw bullish attitudes rising last week in its weekly survey of investor sentiment. That survey had 43 percent of investors bullish, up 2.8 percentage point from the previous week and higher than the long-term average of 39 percent.

Bespoke Investments registered an even stronger figure. In its weekly sentiment survey, 61 percent said the S&P 500 would be higher a month from now - up 7 points from the previous week. So despite the rough sledding, most investors don't appear to be spooked by this market.

Different Directions for Stocks

Last week was a rough one for the major stock market indexes, with both the S&P 500 and the Dow Jones industrial average losing 1 percent of their value. The S&P is now down 6.2 percent from the high it set a month ago, on September 18; the Dow is down 5.2 percent from its September high.

But it's important to remember that those two indexes aren't the entire market. The Russell 2000 - the most widely used benchmark for small-cap stocks - had a good week, rising by 2.8 percent. In contrast, while the large-cap indexes were doing well for most of the summer, the small caps were suffering, dropping 13 percent between early July and the beginning of last week.

We expect small-cap stocks to be more volatile than large caps, and the Russell 2000 is still down nearly 6 percent on the year. But we may be seeing that particular asset class finally start to turn the corner.

Europe's Woes Continue

The Eurozone had another rough day yesterday, with its benchmark index, the Stoxx Europe 600, dropping to a ten-month low. Most of that damage has happened recently, with the index down by more than 10 percent since the middle of September.

One of the biggest concerns now is that Europe is risking deflation, which would be very dangerous for stock prices. September's inflation rate in the Eurozone was just 0.3 percent, far below the target of 2.0 percent.

The fear among American investors is that problems in Europe will once again have a bearing on stocks here at home. In the globalized economy, that's almost inevitable. The main part of our Web site has a new article, "The Global Village," describing how and why the two markets are connected, and how investors can protect themselves. I encourage you to give it a read.

The Return of Volatility

The five-year bull run of the stock market has been notable for its relatively low volatility, but it appears as if we're getting back to a rough ride. The S&P 500 index has already moved by 1 percent or more on seven trading days in October. That follows just one such trading day in each of August and September. And there were so much days in either May or June.

The more sophisticated metrics are showing the same effect. The CBOE Volatility Index, commonly known as the VIX, rose by 25 percent on Wednesday to 28.53. That's its highest close since December 2011.

The long-run average for the VIX is 20, which means this market is now well above average on volatility. If it appears even more volatile than normal, that might be because it's been so low in recent months. In July, the VIX got down near 10, a multiyear low-water mark.

The Daddy Bonus

Everyone's heard of the mommy penalty, wherein women with children tend to make less money in their careers. But according to a study by a researcher at CUNY, the opposite may be true for men. In 2010, male workers with children tended to earn 40 percent more than childless men.

Part of that may result from the fact that fathers tend to be older than men without children, and thus more established and more senior in their jobs. But the data also showed that even among similarly aged men, the difference persisted. In the 35-49 cohort, men with children earned a median of $54,500 in 2010, while those without children earned a median of just $35,970.

That's an even starker difference than the mommy penalty. In that same year and age range, women with children earned a median of $30,520, while those without earned a median of $32,700.

Trust Growing in Advisors

The annual Main Street Investor study came out last week, and it appears that American investors are feeling increasingly confident about their financial advisors. When asked how effective various entities were at protecting investor interest, 70 percent expressed confidence in their advisors, up from 66 percent in 2012. When asked whom they would trust as for advice about investing in a public company, 72 percent of investors said they would use their advisor, more than those who would turn to SEC filings, financial reports, family and friends, or social media.

Confidence in advisors is highest in the wealthiest group surveyed: Among those with more than $100,000 in investable assets, 71 percent said they were confident, compared with 67 percent of those with fewer than $50,000 in assets. At all asset levels, women trusted their advisors more than men did.

Why do investors trust their advisors? The survey found two answers tied at the top of the list: "Personal relationship/Honest/Trustworthy" and "Track record/experience" were both cited by 29 percent of the respondents.

The Global Village

The American stock markets had a rough week last week; the Dow Jones industrial average lost 2.7 percent of its value, and is now down overall for 2014, with a loss of 0.2 percent. One of the reasons given for last week's performance was the poor economic news coming out of Europe, and especially Germany, which is the Eurozone's acknowledged financial leader.

It may seem odd that Europe's problems would have such an effect on U.S. stocks, but we are truly living in a global economic village these days. According to S&P Dow Jones indices, the S&P 500 companies garner nearly half - 46 percent - of their sales outside the U.S. About 7 percent of that comes directly from Europe.

The rising value of the dollar has exacerbated the overseas woes of American companies. The dollar is up 9 percent versus the euro over the past six months, which reduces the profits earned by American goods sold in Europe. That's just another global factor to watch in monitoring the American market.

Washington's Woes

Does the constant bickering out of Washington sap your confidence about how your investments will perform going forward? If so, you're not the only one. A new poll from Gallup asked investors whether various political factors were hurting the investment climate in the U.S., and the number one response was "political discord in Washington," cited by 88 percent of the respondents.

The only other factor cited by more than 80 percent of those surveyed was "Events in the Middle East." Some other top factors: "The widening gap between wealthy and middle-class Americans," cited by 78 percent; "U.S. immigration policy," 70 percent, and "Financial conditions in Europe," 65 percent.

At the bottom of the list was the current level of interest rates. Some 40 percent of the respondents said those were harming the investment environment - but another 40 percent said those same interest rates were helping.

A Violent Couple of Days

Watching the market's moves on individual days can be a bit of a fool's errand. For long-term investors, what matters is the larger pattern, not the day-to-day movement. The last two days have been an illustration of that. Tuesday looked like a disaster, with the S&P 500 losing 1.5 percent of its value. But there wasn't much time to panic: The index made all that ground back and more yesterday, rising by 1.75 percent.

It may feel like the markets whipsaw investors around like that fairly frequently, but according to research from Bespoke Investments, it hasn't happened that much lately. In the bull market that started in 2009, there have been only six other times when the S&P has lost, then gained at least 1.5 percent on consecutive trading days.

This week's gyrations are nothing compared to what we saw in August of 2011. The S&P 500 lost 4.4 percent of its value one day, only to gain back 4.6 percent the next day, in the midst of the European debt crisis and S&P's downgrade of the United States' credit rating. Now that's market turbulence.

Europe's Woes Continue

Five years into the recovery, the American economy continues to look OK, but not great. We finally dropped below 6.0 percent unemployment in September, after it had peaked in 2010 at 10.0 percent. Consequently, unemployment has fallen 41 percent from its peak.

Our unemployment situation isn't where we want it to be, but things could be worse. Take a look at the rest of the world.  The Eurozone unemployment rate currently stands at 11.5 percent, down just a smidgen from its peak at 11.9 percent during the last recession.  The unemployment rate in Europe has fallen only 3 percent from its peak.

Not surprisingly, European stocks continue to suffer as well. We noted that the Russell 1000 small-cap index had dipped into correction territory last week, losing 10 percent of its value off its recent peak. The MSCI EMU index of European stocks has been even worse lately - it has dropped more than 15 percent since peaking in June.

Giving Money Back to Shareholders

There are two primary ways companies can put their money into their investors' hands. They can pay dividends, or they can buy back their own shares, which reduces the number of shares on the market, increasing the price of each one. And they've been doing a lot of both lately: According to Bloomberg, companies in the S&P 500 are expected to spend $914 billion on share buybacks and dividends this year. That's about 95 percent of all their earnings.

S&P 500 companies will spend $565 billion on repurchases this year, according to estimates from S&P. They will spend $349 billion on dividends, raising them by 12 percent. It's no surprise that money returned to stock owners in these ways exceeded overall profits in the first quarter and may do so again in the third.

It's not just current profits that are funding all these buybacks and dividend payouts. Companies in the S&P 500 are sitting on $3.59 trillion in cash and marketable securities, and want to put that money to good use.

Rough Times for Small Caps

While large-cap stocks continue to have a solid if unspectacular year, small caps officially entered correction territory last week. What that means is that the Russell 2000 index - the leading benchmark for small-cap stocks - has lost 10 percent of its value since peaking last March.

Of course, we expect small-cap stocks to be riskier than large caps. According to research from Birinyi Associates, the Russell 2000 is 4.5 times more volatile than the S&P 500. There have been nine corrections in the Russell 2000 since the market bottomed out in March 2009. So a correction in that asset class is almost to be expected.

What should we expect from small caps now? Birinyi's research suggests that the average small-cap correction ends up resulting in a 14.8 percent drop in value. Small caps may have a but further to fall.

An Unemployment Milestone

The September jobs report was out this morning from the Bureau of Labor Statistics, and it marked a milestone. The headline unemployment number has dropped to 5.9 percent, the first time we have been below 6 percent since July 2008, when it was at 5.8 percent.

The Fed has long since set its target at 6 percent unemployment to consider raising interest rates. Most Fed-watchers didn't expect us to get there till the end of this year. It will be interesting to see the reaction to this morning's news.

Overall, the economy added 248,000 jobs in September, marking the seventh time in the past eight months that the number has been over 200,000. August's figure was revised upward from 142,000 to 180,000, which is a step in the right direction but still short of that 200K plateau. Overall, the economy has averaged 213,000 new jobs per month over the past year.

Invest Like a Billionaire

Do you want to invest like a billionaire? The new UBS Billionaire Census breaks down where the world's ultra-wealthy have been putting their money. They're not buying as many stocks as you might think: 47 percent, or $3.4 trillion, of the wealth of billionaires is privately held, one and a half times more than the 29 percent of their assets that is publicly held.

They've also been putting more of their money into cash. Billionaires increased their liquidity holdings this year to an average of $600 million per individual,  which is up by $60 million per individual since last year.

A further 5 percent of billionaires’ net worth, equivalent to $160 million per individual, is held in real estate and luxury assets. The typical billionaire owns four properties, each worth, on average, $23.5 million. You'd think one of those would suffice.

The Fourth Quarter Track Record

Today marks the first day of the fourth quarter, which is generally a good period for investors. According to research from the Bespoke Investment Group, the S&P 500 has averaged a 2.6 percent gain in the final three months of the year since 1928 – which is more than 10 percent on an annualized basis. In that time frame, the fourth quarter has posted a positive performance 72 percent of the time.

These trends have held up in recent years.  Since 2009, the S&P 500 has risen in four out of five fourth quarters, all except for 2012. The S&P 500 has risen by at least 10 percent in three of the past four fourth quarters.

 

This is also a midterm election year, and for whatever reason, stocks have performed even better during fourth quarters of those years. The S&P 500 has averaged a 6.5 percent gain in the final three months of the 21 midterm election years since 1928, and has been positive in 18 of those 21 years.