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Monthly Market Update - September 2014

October 16, 2014

Summary

Most major indices declined in September, as looming geopolitical tensions and a pessimistic outlook for global growth attributed to the selloff. Despite this pessimism, strong U.S. economic data continued, including an upward revision to second quarter real GDP growth and a decline in the unemployment rate. On the equities front there was nowhere to hide as U.S. small stocks fell sharply (down 6.0%), while the S&P 500 fared better with a 1.4% decline. Developed international stocks declined 3.8% and international small stocks were down 5.3%. Emerging markets were also hit hard with a 7.4% drop. Bond yields rose slightly causing intermediate-term bonds to decline 0.5%. Inflation-protected bonds lost ground by 2.5% due to lower inflation concerns around the world. Even alternatives were not immune from the selloff, as REITs and commodities slipped 6.3% and 6.2% respectively. In sum, market pullbacks can be distressing especially since we have not had one in quite some time. However, they are normal, and we do not believe this to be a significant cause of concern for long-term investors.

Economy

  • The final report of second quarter U.S. real GDP growth came in at 4.6%. The rebound was expected after the first-quarter decline of 2.1%. This keeps the U.S. economy on track with slow but steady growth on average.
  • Inflation (CPI) for the month of August was negative, held down by cheaper gasoline prices. Year-over-year inflation dropped to 1.7%, slightly below the Federal Reserve’s long-term inflation target of 2.0%.
  • Housing starts fell sharply from the month prior to an annual level of 956,000. Weaker-than-expected home prices and sales also added to mixed signals for the housing market.
  • The Consumer Confidence Index fell to 86.0, down from 93.4 the month prior – the first drop in five months.
  • The unemployment rate ticked down to 5.9% in September, its lowest level in six years. Employers added 248,000 jobs, well above consensus forecasts of 215,000.

U.S. Equity

  • The S&P 500 Index declined 1.4%. The energy sector was the largest drag on the index by far, declining 7.6% for the month. U.S. small stocks were hit hard, with the Russell 2000 Index down 6.0%.
  • U.S. large stocks have outperformed all other stock markets year-to-date as strong fundamentals (corporate earnings) supported performance.

International Equity

  • Developed international stocks (MSCI EAFE Index) declined 3.8%, and international small stocks fared worse, down 5.3%. Australia was the biggest drag on the index, down 11.4%. The U.S. Dollar appreciated, as it did in September, hampering international stock returns for U.S. investors in developed and emerging markets.
  • Emerging market stocks (MSCI Emerging Markets Index) were the worst performing asset class (down 7.4%), but they are still positive year-to-date. Brazil was the worst performing country with a 19.2% decline, as their economy slowed.

Fixed Income

  • The Fed continued its path of tapering bond purchases in September by reducing the monthly amount by $10 billion as planned. The program is still on pace to end in October.
  • Bond yields rose slightly, and the Barclays U.S. Intermediate Government/Credit Bond Index declined 0.5%. International bonds (JPM GBI Global Ex US Hedged Index) were flat for the month, and TIPS declined 2.5%.

Alternatives

  • Commodities (Bloomberg Commodity Index), which had strong performance early in the year, dropped 6.2% in September. Grains and precious metals were the biggest drags on the index, down 12.4% and 7.6% respectively.
  • The S&P Global REIT Index declined 6.3%; however, REITs have had very favorable performance year-to-date (+ 11.7%).

Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar, Standard and Poor’s, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch

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