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Monthly Market Update - October 2014

Summary
The bull market remains intact. Stocks were able to recover from a pullback earlier in the month, and the S&P 500 Index reached new all-time highs. U.S. small stocks (Russell 2000) outperformed large stocks, returning 6.0%, while the S&P 500 Index returned 2.4%. Economic data was mostly positive as third quarter U.S. real GDP growth came in at 3.5%, housing starts rose back over 1 million, and the unemployment rate ticked down to 5.8%. International stocks were a drag on performance with international large stocks declining 1.5% and international small stocks falling 1.8%. Emerging market stocks ended the month in positive territory, up 1.2%. The Federal Reserve brought an end to its bond buying program as planned, and the 10-year treasury yield fell 17 basis points to 2.35%. Bond returns were favorable with intermediate-term bonds returning 0.7%, international bonds up 0.5%, and TIPS gaining 0.9%. On the alternatives front, the recent drop in oil prices contributed to the decline in commodities this year. However, commodities only declined 0.8% in October. REITs reignited their rally from earlier in the year, returning 7.3% for the month, and are now up nearly 20% year-to-date.

Economy

  • The first estimate of third quarter U.S. real GDP growth came in at 3.5%. Although lower than the second quarter growth rate of 4.6%, the deceleration was largely accounted for by decreased inventory investment which is an indication of strong corporate sales. This keeps the U.S. economy on track with slow but steady growth.
  • Inflation (CPI) for the month of September was 0.1%, held down by cheaper gasoline prices. Year-over-year inflation remained at 1.7%, slightly below the Fed’s long-term inflation target of 2.0%.
  • Housing starts rose from the month prior to an annual level of 1.0 million. The September housing report showed that median new home prices fell 4.0%, and existing home sales rose by 5.9% from one year ago.
  • Consumer confidence climbed higher reaching 94.5 in October. The Consumer Confidence Index is back at its highest point since prior to
    2008.
  • The unemployment rate ticked down to 5.8% in October, its lowest level in six years. Employers added 214,000 jobs during the month which was slightly below consensus forecasts of 235,000.

U.S. Equity

  • The S&P 500 Index rose 2.4% in October despite the energy sector’s 2.9% decline. Utilities and health care were among the best performing sectors, rising 8.0% and 5.4% respectively. U.S. small stocks outperformed large stocks for the month with the Russell 2000 Index (+6.0%) surging into positive territory for the year.
  • U.S. large stocks have outperformed all other stock markets year-todate as strong fundamentals (corporate earnings) supported performance.

International Equity

  • Developed international stocks dragged on performance. International large stocks (MSCI EAFE Index) declined 1.5%, and international small stocks fared slightly worse, down 1.8%. Italy and France were among the worst performers for the month, down 5.8% and 4.4% respectively. The strength of the U.S. dollar has adversely affected stock returns for U.S. investors in developed and emerging markets year-to-date.
  • Emerging market stocks (MSCI Emerging Markets Index) returned 1.2% for the month. South Africa (+6.7%) and India (4.0%) were among the best performers.

Fixed Income

  • The Fed completed its final $5 billion of bond purchases in October bringing the bond buying program to an end as planned. Accommodative monetary policy has been used to stimulate the economy for nearly six years, so the ending of the program is good sign that the Fed believes the economy is strong enough on its own.
  • Bond yields fell for the month with the 10-year Treasury yield falling to 2.35%. The Barclays U.S. Intermediate Government/Credit Bond Index returned 0.7%, while international and inflation-protected bonds also had a good month.

Alternatives

  • Commodities (Bloomberg Commodity Index) dropped 0.8% in October. Energy (-9.0%) was the main reason for the decline in the index largely due to falling oil prices. Grains held up the index with a 14.3% gain.
  • The S&P Global REIT index reignited its rally from early in the year gaining 7.3% for the month. REITs are now up 19.8% year-to-date.
    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
Posted in: Market Commentary
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