Washington tried to scare the financial markets this October, but the markets did not flinch. Those classic horror picture reruns are not quite as scary the second time around.
October started with the first government shutdown since 1996 and the market yawned. It has been a while, but the market experienced fourteen government shutdowns during the ten year period ended in 1988, so the old timers have seen this show before. The second picture in this double feature was the debt ceiling crisis. The U. S. self-imposed debt ceiling limit has been approached fifteen times since 2000 and every time the story ends with the debt ceiling being raised and the crisis averted. In addition to these headlines, the market also took bad economic news (a weak September employment number) and twisted it into good news. The collective wisdom deduced the Federal Reserve’s tapering plans will now be delayed well into 2014. The pending departure of Federal Reserve Chairman Bernanke and the nomination of his current vice-chair, Janet Yellen, were much anticipated and the markets climbed higher. A new round of quarterly earnings releases also kept price momentum positive.
Stocks and bonds each had a positive impact on your portfolio in October. The S&P 500 set new record highs on numerous occasions and the NASDAQ reached levels not seen for thirteen years. Even the bond market rallied. For the month, all the majority equity markets indices had returns around 4.00%. The S&P 500 gained 4.60%, MSCI Emerging Markets 4.86%, NASDAQ Composite 3.98% and the MSCI Europe, Asia, Far East (EAFE) 3.36%. The Barclay’s US Aggregate Bond Index returned 0.81% for the month and minus 1.08% for the trailing twelve months. Once again, high yield was the best monthly performing bond sector with a 2.51% return. Commodities continued their extended struggle with another down month lead by declines in oil prices. The Dow Jones Commodity index fell 1.48% during October.
The spring bond market sell off ended quickly and interest rates have now stabilized. Yields on the 10-year U.S. Note rallied from a 2013 high water mark of 3.00% in September and fell back to 2.48% intra month and finished October yielding 2.55%. Assuming Janet Yellen becomes the next Federal Reserve Chairwoman; expect short-term interest rates to remain low well into 2014. It appears the new 2.50%-3.00% range on the 10-year Treasury has replaced the policy induced 1.50%-2.00% range of the past few years. While the twelve month returns from investment grade bonds are still in negative territory, the recent strength is inching the bond market back toward unchanged for the year. High yield bonds continue to ride the coattails of a strong equity market.
As we begin looking ahead to the 2014 markets our advice to investors is to set realistic expectations and remain invested. If you are a 2008 doomsayers, it’s been five years now and it is time to move forward. If your perception of the financial markets is, “the glass is half empty”, it may be time to view the 2014 market in a different light. Let market fundamentals, not breaking news, drive your opinion of the market. While twenty percent annual returns in the stock markets are not sustainable over the long haul, five to eight percent returns can be achieved. Stocks today are fairly valued based on next year earnings estimates and projected price/earnings ratios. This coupled with stable economic growth creates an environment which can produce positive single digit equity returns in the years ahead.