Highlights for the week ending November 1, 2013:
A Macro View – October Monthly Recap
Domestic equity markets posted strong gains in October, as investors were encouraged by the resolution of the debt ceiling discussions and budget crisis. In addition, third quarter earnings reports have come in better than expected, creating a “sweet spot” environment for equities. Analysts see very few risks on the horizon – which in itself could be considered a risk – as the Fed is likely to maintain a highly aggressive monetary policy, GDP growth is expected to accelerate into 2014, and the fiscal situation is marginally improving. Economic data during the month was mixed, with the employment situation remaining lackluster, but manufacturing and housing continuing to be relatively strong. For the month, the S&P 500 advanced +4.6%, and is now up +25.3% on a year-to-date basis. The Dow Jones Industrials posted a +2.9% gain (+21.0% YTD), and the tech-heavy Nasdaq Composite Index was up +4.0% (+31.3% YTD). The Russell 2000 Index of small cap stocks underperformed the Russell 1000 Index of large cap stocks, with gains of +2.5% and +4.4%, respectively. In terms of sector performance, telecom services were the strongest performers on a relative basis, gaining +8.5%, while financials pulled up the rear with a gain of +3.3%.
International equity markets generated gains in line with the U.S. markets in October, with the MSCI World ex-U.S. Index advancing +3.4% for the month. Emerging markets bucked a recent trend of underperforming developed markets, with the MSCI Emerging Markets Index gaining +4.9%, as compared to the +3.4% gain of the MSCI EAFE Index. Regionally, Eastern Europe, Asia and Latin America were the best performers, with the MSCI Eastern Europe Index advancing +4.9%, and the MSCI Asia Index and MSCI EM Latin America Index each gaining +4.8% for the month. Although Japan had flat performance for the month, it is among the best performing countries/regions on a year-to-date basis with a +24.5% gain.
Fixed-income markets enjoyed a second consecutive month of solid performance. The primary driver was a growing consensus among market participants that the Fed will refrain from tapering its quantitative easing program until sometime in 2014. Economic data continues to be not as strong as expected, and inflation remains below the Fed’s target expectations. In addition, the employment situation, one of the Fed’s key indicators, remains sluggish despite a slight decline in the unemployment rate. Against this backdrop, the benchmark 10-year U.S. Treasury yield ended the month at 2.54%, a decline of seven basis points from September 30th. Broad-based fixed-income indices advanced in October, with the Barclays U.S. Aggregate Bond Index gaining +0.8% for the month. Global fixed-income markets posted strong gains relative to U.S. bonds for the month, with the Barclays Global Aggregate ex-U.S. Index climbing +1.1%. High yield bonds advanced with other risk assets like stocks; the Barclays U.S. Corporate High Yield Index posted a gain of +2.5% for the month. Municipals also continued to recover from steep losses two months ago by posting a gain of +0.8% in October , which followed September’s +2.2% advance.