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The “October effect” came in full force this week as the Dow Jones Industrial average dropped more than 800 points over the first two days of the month. The S&P 500 also had a poor performance, falling below its 50-day moving average due to the lowest manufacturing data numbers in a decade.

The “October effect” is mainly a psychological phenomenon in the trading world as many of the United States’ worst financial disasters happened during the month (Black Tuesday in 1929, Black Monday in 1987 and the beginning of the financial crisis in 2008). Recently, October has actually been one of the best performing months of the year with regard to equities. As one analyst put it, “even the slightest bit of volatility can cause overreaction in the market.”

Manufacturing data is what caused most of this week’s volatility, with two closely watched indices showing lower than expected readings. The Institute for Supply Management’s manufacturing and non-manufacturing were at their lowest levels since 2009 and 2016 respectively. The manufacturing index deals with the U.S. factory production of goods while the non-manufacturing index focuses on the service sector like healthcare, retailers and computer services among others. 

After that sharp drop across the Dow and S&P 500, Thursday’s numbers rebounded on the news that the Federal Reserve is expected to ease rates at the October meeting. Right now the market is pricing in a 95% chance that the Fed will ease rates at the Federal Open Market Committee meeting at the end of this month.  

This volatility has pushed bond yields back down with the 10-year Treasury note yield trading at 1.53% as of Friday morning. A lot of this volatility was not reflected in the Freddie Mac mortgage averages this week so we are still seeing the 30-year fixed rate average holding steady around 3.65%. You should expect to see that drop by a few basis points in next week’s report.

Despite all the trade volatility and global economic slowdowns, the U.S. labor market continues to buoy the economy and drive the 11 year growth of the economy. The ISM non-manufacturing index, while showing a steep drop from August to September, is still reading above 50%. Any reading above 50% is seen as a sign of an expanding services sector.

The latest jobs report shows that unemployment is still sitting at a 50-year low but nonfarm payrolls rose by a significantly less amount than expected. Nonfarm payrolls added 136,000 jobs in September against expectations for 146,000, according to the Labor Department. Wages rose, albeit slightly, and are up by 2.9% for the year.

Another thing to keep an eye on is the end of the conservatorship of Freddie Mac and Fannie Mae. This will be a very slow process but the ball is rolling. Fannie and Freddie became government-sponsored entities in September 2008, during the financial crisis. Since then, their profit has gone back to the U.S. Treasury to pay the government back for bailing them out. Now, it’s been decided that Freddie and Fannie will be allowed to keep up to $20 billion and $25 billion, respectively, in capital as they leave government conservatorship.

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Movement Staff

The Market Update is a weekly commentary compiled by a group of Movement Mortgage capital markets analysts with decades of combined expertise in the financial field. Movement's staff helps take complicated economic topics and turn them into a useful, easy to understand analysis to help you make the best decisions for your financial future.