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.

A successful third quarter in the financial markets has ended and the hype from Washington is once again the number one story in the land. We have heard these stories before: a government shutdown, debt default and raising the debt ceiling. The debt ceiling in the United States has been raised fourteen times in this thirteen year old 21st century. A fifteenth increase is a safe bet. As the media spotlight shines on Washington’s fiscal issues, investors will become more concerned and market volatility will increase in the weeks ahead.

The political nature of the debt ceiling debate and a potential government default will receive full coverage by all the media outlets, but there are other key stories occupying the front page that will impact the fourth quarter financial markets. Uncertainty regarding the next chairperson of the Federal Reserve, questions about Fed policy and future tapering plans, geopolitical instability, economic growth, unemployment rates, and a new corporate earnings season will influence future of stock and bond prices. Before we look ahead, let’s review what happened.

International stocks had a huge month taking the lead role after many months of weaker performance. The MSCI EAFE Index jumped 7.39% and the MSCI Emerging Market Index gained 6.50% for September. U.S. equity markets posted attractive gains for the month ranging from up 2.27% on the Dow Jones Industrial average to up 5.14% on the NASDAQ Index. For the trailing twelve months, if you invested in stocks you should be gratified with returns near twenty percent. For the doom and gloom investors who moved into gold and commodities a year ago it was a different story. Gold is down 25.0% over the past year and commodities in general have fallen by 14.35%.

The bond market crashed in May and June as the Federal Reserve hinted at ending their accommodative policies. Yields on the 10-year U.S. Note moved from 1.70% to 3.00% very quickly. The “taper” is now priced into the bond market and September marks the third consecutive month where bond investors are getting accustomed to a new trading range. It appears a 2.50%-3.00% range on the 10-year Treasury has replaced the unsustainable 1.50%-2.00% range of the past few years. While the twelve month returns from investment grade bonds are in negative territory, the higher current interest rates give bonds a more compelling relative value moving forward. High yield bonds continue to shine reflecting strength in the both the equity markets and lower quality corporate credit.

If you own bonds in your portfolio, remember why. Bonds provide for capital preservation, income, stability and low correlations to equity returns; important components for successful long-term portfolio strategies.

The fourth quarter and particularly October tends to be a stern test of investor resolve. Our long-term view is stocks can still move higher in 2014 as fundamentals like corporate earnings, consumer confidence and global economic growth will move prices upward. Even though stock prices are near all-time highs, they are still reasonably priced relative to other asset classes. Stock gains in the fourth quarter though will likely remain muted as volatility increases and investors digest the stories of the moment.

Our best advice to all investors is to not let yourselves get trapped into thinking today’s breaking news is tomorrow’s end of the world. Years matter – days, weeks and months are irrelevant in the bigger picture. We may experience some headline induced turbulence in the fourth quarter; fasten your seatbelt, sit back and enjoy the ride to your financial destination.

Wall Street has developed its own nomenclature over the years to uniquely describe marketplace situations. The adage best describing the current market and season is the “summer doldrums”. This refers to a period in the markets when trading volumes are reduced; many brokers and investment personnel are vacationing prior to the official end of the summer doldrums, Labor Day.

August produced lackluster results as the stock and bond markets quietly moved downward during the month with generally lower trading volumes. Commodities bucked the trend with positive returns after many months of poor performance. The markets are entering the fall season with more questions than answers. Will the Federal Reserve begin its much discussed tapering? Will the tension in Syria and the Middle East escalate into a larger military conflict? Will higher interest rates derail the housing recovery? Will another debt ceiling debate cause market angst? Will the stock market and corporate earnings hold up under external pressures? Unanswered questions mean uncertainty which leads to both opportunity and higher market volatility. Expect the unexpected in the coming months.

The international and U.S. equity markets all posted negative returns for the month ranging from down 4.11% on the Dow Jones Industrial average to down only 0.82% on the NASDAQ Index which was helped by the strength of Apple. Trailing twelve month numbers are still very impressive for the major stock indices at just below twenty percent. Emerging markets and commodities continue to lag, but are beginning to show signs of life once again. Their day will come.

If you have been participating in the market, our advice related to stocks is to stay the course and remain diversified. If you are observing stocks from the sidelines, look for any short-term price weakness as an opportunity to achieve your proper allocation to equities. While stocks continue to explore new record high levels, their current valuations are justified by historical standards. Remember the main role of stocks in your portfolio; to provide for long-term growth and build wealth. They have been doing exactly that for the past four plus years.

The bond market violently sold off in May and June as the Federal Reserve hinted at ending their accommodative policies. Yields on the 10-year U.S. Note rose from 1.70% to 2.70% in quick fashion. The “taper” is now priced into the bond market and August was the second consecutive month where bond investors are getting accustomed to a new trading range. It appears the 2.50%-3.00% 10-year Treasury yield range has replaced the artificially low 1.50%-2.00% range of the past. This is not all bad new as the bond market is more attractively priced looking forward.

Bonds provide for capital preservation, income, stability and low correlations to equity returns; important components for successful long-term portfolio strategies. Resist the temptation to change your long-term portfolio strategy because of short-term price movements.