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Quarterly Review: Oct 7, 2013

John Gorlow | Oct 07, 2013

Washington's Impasse May Challenge a Solid Quarter

Global stock markets posted broad gains for September closing out a profitable quarter. The MSCI All World Index returned 5.17% for September and 7.9% for the latest three months. Further, every major developed and developing market gained for the quarter except for Indonesia. Through the end of September, YTD returns for the All World index totaled 14.43%.

As the U.S. moved towards the possibility of government shutdown at the end of September, the MSCI U.S. Broad Market index underperformed the rest of the world returning 3.74% in September compared to the MSCI World ex―U.S. Developed Market index which returned 7.07% and the MSCI Emerging Market index which returned 6.5%.  Quarterly returns for developed markets jumped higher on September results. The Broad U.S. Market returned 6.33% while the ex―U.S. Developed Market returned 8.18%.

After taking a pounding during the first half of 2013, Emerging Markets held on to 5.77% quarterly returns. However, Emerging Market YTD returns remained negative due to the trifecta of continuing expectations of U.S. "tapering"—which could lead to weaker global demand—concerns over economic contractions in China and weak commodity prices. Attractive valuations and stronger global growth should eventually deliver better returns for diversified Emerging Market investors.

All major U.S. asset classes posted positive results in September. With the exception of Reits, U.S. asset classes maintained a positive performance for the quarter. U.S. small cap stocks outperformed U.S. large caps stocks, and U.S. growth stocks outperformed U.S. value stocks. For the quarter asset class returns ranged from 12.8% for U.S. small growth stocks to 3.94% for U.S. large value stocks. As for the S&P 500, note that it returned 3.14% for September, 5.24% for the quarter and 19.79% YTD through September.

Good news on the European front as stocks were driven higher on growing signs that the Eurozone may be pulling out of recession. The shoots are still green, but the ECB stands ready to inject liquidity into the banking system, if necessary, per the ECB President Mario Draghi.  The MSCI European index returned 7.19% in September which propelled quarterly returns on the index to 13.61%. Just last fall Europe was sinking into a recession. Many were questioning whether the European Union would overcome such a severe debt crisis. However, YTD through September, European stocks returned 16.09%, outperforming the broad U.S. market in the third quarter by almost three times.  Those who sold European assets last year locked in losses rather than regaining returns YTD; once again those who didn’t shuffle their portfolio were rewarded.

Due to concerns of economic contraction in China, Asian markets were shaken throughout the summer, but by September the picture brightened. Signs that China may be back on its previous trajectory fueled stock rallies in Australia, Hong Kong, New Zealand and Singapore. A 15.8% return in New Zealand stood out and drove quarterly returns on the MSCI Pacific Ex-Japan index to 10.33% whereas the MSCI Japan index only returned 6.66%. Overall, Asian stocks as measured by the MSCI Pacific stock index returned a healthy 7.99% for the quarter outperforming the Broad U.S. market but underperforming European stocks. 

The Federal Reserve’s delay of any stimulus tapering led to better results for U.S. fixed income markets. Yields on the U.S. 10-year note tightened from 2.87% to close the month at 2.61% compared with a high of 2.99% on September 5th. Economic trouble continues to cast a shadow on Puerto Rico and Detroit municipal debt, but municipal bonds, on the whole, rallied back against last month’s losses returning +2.19% in September, as measured by the S&P National AMT-Free Municipal Bond index.  Investment-grade corporate bonds recorded a 0.61% return for September and thus chipped away at  -2.42% YTD returns, as tracked by the S&P U.S. issued investment grade corporate bond index.

The Dow Jones - UBS commodity index was  -2.6% for September and +2.13 for the quarter, driving YTD returns to - 8.6%.  Gold and silver were -5% for the month and -7.7% for the month respectively, leaving their respective YTDs at -21.2% and -28.8% . The energy sector closed September at -4.3%, and +.77% for YTD.

Though the government shutdown is preoccupying, the real concern for the coming month is the October 17 deadline for raising the debt ceiling. While the chance of a default is unlikely, it is still a possibility. Credit markets could freeze, the value of the dollar could plummet, U.S. interest rates could sky rocket and stock markets could dive.  Though we all trust that reason will prevail, it is important to be prepared for a bumpy ride with an adequately diversified asset allocation tied to one’s risk tolerance and investment objectives. Hedging strategies that some may consider are ill-advised because they are cost-prohibitive with high, return-undermining transaction costs. Investors must focus on their long-term goals and must remain committed to a sound, diversified investment plan—matched to their risk tolerance—that is spread across all major equity asset classes. This shrewdly minimizes downside exposure in turbulent markets and minimizes reductions in returns created by individual asset class underperformance.


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