Monthly Market Monitor: October 2011

Global equity markets staged a stunning turnaround in October, reaching three-month highs after bouncing off 2011 lows set on the first trading day of the month. Despite a scary 276-point Halloween decline, the Dow Jones Industrial Average still managed to post its biggest monthly gain since October 2002, up 1,042 points. Within October’s outstanding rally, all three major U.S. equity indices gained each and every week of the month and returned to positive year-to-date total return gains, including dividends. Interestingly, the S&P 500 delivered its best percentage-based monthly performance in nearly 20-years (since December 1991). Small-cap stocks outperformed large-cap companies as the Russell 2000 Index, a proxy of small-cap equity performance, outperformed their larger-cap counterparts with a 15.14% October total return. Although marked by elevated volatility, investors essentially found compelling equity valuations on a back drop that European officials were finally moved to deliver a coordinated plan to end the euro-zone’s two-year long sovereign debt crisis.

Following intense political drama, media leaks and counter-claims, European Union (EU) officials released an outline plan that increases the European Financial Stability Facility (EFSF) bailout fund to €1 trillion and recapitalizes troubled banks after writing down increased “voluntary” principal losses on their Greek debt holdings (50% from 21%). In a marathon overnight summit, Greece agreed to additional austerity measures, though on Friday, October 31st Greek PM Papandreou said the measure should be put to a public vote. Generally improving economic reports in the month culminated in an October 26th GDP report showing the U.S. economy grew 2.5% during the third quarter, in-line with forecasts and up from second quarter growth of 1.3%.

In sector performance, all ten major market groups advanced last month with Materials (+17.73%) and Energy (17.05%) the top performers. Financials (+14.33%) and Industrials (+14%) also generated strong results. Not surprisingly, the three defensive oriented sectors, Healthcare (+5.75%), Consumer Staples (+4.51%) and Utilities (+3.60%) failed to keep pace with the broad market averages. Telecom (+2.97%) was the biggest laggard last month. Utilities remain the best performing sector on a 2011 year-to-date basis, up 14.73%.

While still underwater on the year, non-U.S. developed equity markets also delivered positive performance last month, up 9.65%, as measured by the MSCI EAFE Index. As measured by the MSCI Emerging Markets Index, emerging markets outperformed developed nations last month with a 13.26% gain. Interestingly, emerging markets largely excelled without much help from China (+4.6% on the month, -12.1% year-to-date).

Although the Federal Reserve refrained from issuing any new shock and awe “QE3 stimulus” announcements in October, the Fed implemented “Operation Twist,” a 1960’s era measure announced in September meant to reduce long-term interest rates by selling its shorter-term portfolio assets and buying longer-term Treasuries. The benchmark 10-year Treasury yield however, rose by 36 basis points last month to 2.11%, while the 30-year Treasury long-bond gained 40 bps in yield to 3.13%.

In other fixed-income market action, while investment grade corporate bonds were just fractionally higher last month, up 0.11% as measured by the Barclays US Aggregate Bond Index, the asset class has delivered a solid 2011 year-to-date gain of 6.76%, more than quadruple the 2011 year-to-date gains in S&P 500 stocks. Municipal bond performance was modestly negative in October as the Barclays Municipals Index fell 0.37%, but still remains among the best performing asset classes on a year-to-date basis, up 8%. High-yield corporate bonds led fixed-income performance in October, as measured by the 5.99% return on the Barclays US Corporate High Yield Index, yet lagged on a year-to-date basis, up 4.52%.

This information is compiled by Cetera Financial Group. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.

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