October market review

November 2, 2014

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

Markets

  • Global financial markets volatility increased sharply in October. Equity markets pared the intra-month declines and posted mixed performance for the month.
  • The S&P 500 was up 2.44% for October and is up 10.99% year-to-date (YTD). The Russell 2000 index, which tracks domestic small cap stocks, was up 6.59% and is now positive at 1.90% YTD.
  • The international developed equity index (MSCI EAFE), also pared some intra-month losses, but was down 1.45% for the month and is down 2.81% YTD. This underperformance was again driven mainly by the impact of translating returns in weak underlying currencies (euro, yen) back into dollars for US investors. Emerging markets (MSCI EM), despite the volatility were up 1.18% in October and are up 3.63% YTD.
  • The Japanese Nikkei 225 returned 1.49% in October and is up 0.75% YTD. In October the US dollar rose against major currencies, reaching a seven-year high against the Japanese yen.
  • Fixed income yields fell sharply in October and the yield curve flattened. The 10-year Treasury yield decreased 15bps to 2.34%, from 2.49% in September and the 30-year Treasury yield declined 13bps to 3.07%, from 3.20% in September. The Federal Reserve again left the overnight lending rate unchanged at 0-0.25%.
  • Corporate bond prices increased in October. The Barclays Aggregate Index was up 0.98% for October and up 5.12% YTD. The Credit Suisse Leveraged Loans Index (bank loans) was up 0.29% for October and is up 2.70% YTD.

Economic & Geopolitical Headlines

  • According to advance estimates released by the Bureau of Economic Analysis, the US economy, measured by real gross domestic product (GDP), increased at an annual rate of 3.5% in the third quarter of 2014.
  • Geopolitical and non-financial risks, combined with economic growth concerns, spooked the market in the first half of the month; however, a few well-timed speeches by prominent Fed officials and economic data reassured the markets that the economy is still slowly recovering and that the Fed will remain accommodative until the economy can stand on its own.
  • The Fed held another meeting in October and kept its short-term rates near zero while concluding the taper, and stopping monthly asset purchases, or quantitative easing. Chairwoman Yellen has reiterated numerous times that the Fed has no intention of raising rates in the near future and speculation is now nearly evenly split between whether the Fed will raise rates earlier than forecast (mid-2015) or if the Fed will be forced to resume some form of monetary easing if inflation and growth data continue to disappoint.
  • Expansion in manufacturing in the US continues. The October PMI was back to the August reading at 59.0, an increase of 2.4 percentage points when compared to September. A reading above 50 is considered economic expansion.
  • US job growth increased in October. The Labor Department reported total nonfarm payroll employment increased by 214,000 in October, marking the ninth consecutive month with job growth over 200,000. The unemployment rate declined to 5.8 percent, its lowest level since July 2008.
 
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