The 6.9% decline in the Standard & Poors 500 Stock Index during October, the biggest monthly decline since September 2011, reflected economic fundamentals as well as seasonal and technical factors. The index is now up only 1.4% for the year to date. Thankfully, our reasonably valued, generally conservative mix of equity holdings, virtually all of which met or exceeded their Q3:18 revenue and profit targets, allowed our portfolios to outperform the Index during the month. We have ample cash reserves, which will be deployed prudently, as market volatility abates. Despite the October pain, our conclusion is that the sell-off was only a violent correction within a secular bull market. We do expect a moderate growth slowdown in 2019, but no recession. Corporate profits should manage at least a high single digit advance.
On the fundamental side, both corporate revenues and earnings have been robust, but fewer corporations are reporting upside surprises as they issue their third quarter reports, and many are somewhat less optimistic going forward, particularly about profit margins. Managements note higher input costs due to the Trump tariffs, which they are unable or unwilling to offset with higher selling prices. Although only a trickle so far, there is evidence that some corporations are moving manufacturing operations out of the US. In addition, the strength of the US Dollar is clearly impacting both exports as well as the translation of foreign source profits. Economic slowdowns in Europe, China, and a number of emerging economies, particularly those with substantial dollar-denominated debt, are also contributing to weakness in revenues and earnings. As a result, most market analysts are reducing their expectations for the overall rate of profit growth in 2019, as well as the likely incidence of upside surprises.
In addition to these corporate factors, interest rates have been moving up as the Federal Reserve is gradually reducing its ultra-accommodative monetary policy. Not only has the Federal Funds Rate been boosted to a range of 2.0%-2.25% from a low of 0.0%-0.5%, but the Fed continues gradually to shrink its balance sheet in the face of heavy Treasury financing, as the Federal deficit is rapidly increasing, the result of corporate tax cuts and substantially higher government spending. Money supply growth has slowed just as nominal GDP has picked up. This tightens the overall financial system as the excess liquidity is reduced. Moreover, an ill-timed and somewhat naive remark by Fed Chairman Powell, to the effect that the Funds Rate is still well below a so-called neutral rate, triggered the October sell-off, as investors correctly feared that if the Fed sticks to its present course, the end result will be a recession. Also, the most recent data hints at slowing personal income gains and slowing personal consumption. Online shopping, for example, which has been the strongest component of consumption, appears to be leveling off. Finally, while capital investment has picked up, it is nowhere near a boom. Indeed, many of the economy's high-growth industries are simply not capital intensive.
On the seasonal side of things, October is typically the last month of most mutual funds' fiscal years, and this generally brings forth tax motivated selling at a time when investors are unwilling to add to their holdings, lest they incur an immediate tax liability. In addition, during October, most corporations are in a "quiet period" before releasing third quarter results. Consequently, corporate share buybacks, which have been a mainstay of this bull market, drop off sharply until after the results have been reported. Finally, the daily volatility, which has been unprecedented this year, has been turbocharged by both ETF selling and algorithmic trading, which have accounted for the overwhelming proportion of daily activity.
As we write this month-end summary to our clients, the midterm elections are less than a week away. The awful rhetoric coming from Trump has unnerved investors. While this will diminish after the voting, regrettably Trump will still be Trump. That said, we do not forecast either a recession nor a bear market, just a violent correction from which a renewed advance in equities will emerge. Assuming a GDP growth rate next year of around 2.5%, S&P 500 profits should rise to about $175. If the BBB bond yield, currently 5%, were to rise to 6%, the fair value level of the index would be 2900, up 7.5% from today's level. However, given the moderation in growth that we expect, and the limited rise in inflation, the odds of a 6% BBB yield seem very low. Ergo, our equity forecast seems conservative.