October market review

October 12, 2013

Shortly after the end of each month, our CIO provides highlights of the market and our funds’ performance. Following is a summarized review of October — 

 Markets

  • October saw continued positive performance in financial markets, with many markets hitting multi-year highs as concerns about the shutdown were pushed off and the Federal Reserve elected to continue its bond purchases.
  • For the US equity indices, the S&P 500 was up 4.60% for October and 25.30% YTD. The Russell 2000 underperformed the S&P for the month, up 2.51% in October, but up 30.90% YTD.
  • The Developed International equity index, MSCI EAFE, underperformed the S&P in October and for the year, up 3.36% and 20.05%, respectively.
  • Emerging markets (EM) led all indices, up 4.86% for October and are now positive YTD, up 0.29%.
  • The Japanese Nikkei 225 was down -0.88% for the month but still up 37.83% YTD. This performance, as previously mentioned, has been largely driven by the Bank of Japan manipulating the Yen, which was down -0.09% for the month and down -11.80% YTD.
  • US yields fell as the yield curve steepened on continuation of Fed bond purchases. US corporate issuance reached record levels in September as issuers positioned for higher future borrowing costs. The 10-year was down 6bps to finish October at 2.55% and the 30-year was down 5bps to 3.64%. The Federal Reserve again left the overnight lending rate unchanged at 0-0.25%.
  • The US dollar rebounded in October after sharp declines against most currencies in September.
  • Corporate bonds prices were up in the month of October. The Barclays Aggregate Index was up 0.81% for October but down -1.10% YTD. The Credit Suisse Leveraged Loans Index (bank loans) was up 0.80% for October, and is up 4.99% YTD.
  • Volatility in domestic equity markets picked up in October as investors, and the rest of the world, eyed the shutdown. Volatility dropped back to its historic low after the debt ceiling standoff, and potential debt default calamity were averted.

Economic & Geopolitical Headlines 

  • The stories in October were all centered around Washington: first, the lead-up to and then resolution of the shutdown and debt ceiling debacles; next the nomination of Janet Yellen as Fed Chair; and finally the related decision of the Federal Reserve to continue their bond purchasing (QE) into 2014.
  • The shutdown did have some economic impact. However, the economy is expected to snap back from built-up demand and the Federal Reserve actions have carried the day, prompting markets to hit new highs.
  • Unfortunately, the problems in Washington were not actually solved; rather the debt ceiling was extended until January when our politicians may decide to play out this drama again.
  • PMI numbers show that manufacturing continues to strengthen throughout the world, a signal that the global economy is continuing to improve. In the US, October’s number was 56.4, up slightly from 56.2 in September. A reading above 50 is considered economic expansion.
  • Unemployment ticked up in October to 7.3%, up from 7.2% in September, although the increase in jobs exceeded expectations for the period that included a partial shutdown of the federal government.
  • Domestic growth, as measured by GDP growth, accelerated to a 2.8% annual rate in the third quarter, up from a 2.5% in the 2Q, nearly a full percentage point higher than economists had predicted. This is expected to suffer from the government shutdown effects.
  • Fed Chairman Bernanke reiterated that the recovery was not strong enough to survive without aid, especially in the face of the impasse in Washington. The market has started to focus on, and speculate over, what Ms. Yellen will focus on and implement when she takes over the Fed.
  • Emerging markets, as evidenced by their strong recent performance, seem to have found a bottom in regards to expectations of growth versus actual growth.
 
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