PMC Market Commentary: November 7, 2014
Domestic equity markets were mostly higher in October in volatile trading. October is historically the most volatile month for equities, and this was no exception. It was a tale of two halves, with the S&P 500 declining 5.5% in the first two weeks of the month, but reversing quickly to rise 8.4% through the rest of the month. A key factor in the volatility was investor concern about slowing global growth, particularly since the Federal Reserve ended its quantitative easing program at the end of the month. Domestic economic data remains trending higher, with the first estimate of third quarter real gross domestic product (GDP) coming in at +3.5%, adding to the 4.6% growth of the second quarter.
Within this landscape, stocks posted modest gains in October. The S&P 500 gained +2.4% for the month, and is now up +11.0% on a year-to-date basis. The Dow Jones Industrials also advanced, tacking on +2.2%. The tech-heavy Nasdaq Composite Index rose +3.1%, and is now up +11.9% year-to-date. The Russell 2000 Index of small cap stocks staged a rebound, outperforming the Russell 1000 Index of large cap stocks, with returns of +6.6% and +2.4%, respectively. Growth stocks performed slightly better than value stocks during the month. In terms of sector performance, utilities was the strongest performer on a relative basis, gaining +8.1%, while energy was again the poorest performer, posting a decline of -2.9%.
International equity markets were mixed in October, as investors continue to be concerned about tepid growth in the eurozone region, as well as a slowdown in China. The MSCI World ex-U.S. Index declined -1.6% for the month. Emerging markets were somewhat of a bright spot internationally, after having struggled for much of the year. The MSCI Emerging Markets Index gained 1.2% for the month, and the MSCI EAFE Index, which measures developed markets performance, was up +1.5%. Regionally, the Pacific region ex-Japan was the best performer on a relative basis, rallying +4.8%. Eastern Europe and Europe were among the poorest performers, with results of -2.8% and -2.6%, respectively.
Fixed-income markets performed reasonably well in October, recouping losses incurred in September. Investors bid up bond prices as economic growth and inflation remain contained. As expected, the Fed formally ended its asset purchase program, and analysts are now looking more intently for signs as to when the Fed may begin to raise interest rates. Against this backdrop, the 10-year U.S. Treasury yield ended the month at 2.34%, down 17 basis points from the 2.51% level of September 30th. Broad-based fixed-income indices were mostly higher in October, with the Barclays U.S. Aggregate Bond Index gaining 0.9% for the month. Global fixed-income markets performed relatively poorly, with the Barclays Global Aggregate ex-U.S. Index dropping -0.7% for the month. Intermediate-term corporate bonds gained ground, as the Barclays U.S. Corporate 5-10 Year Index advanced +1.0%. The Barclays U.S. Corporate High Yield Index retraced some of the losses from the prior month, posting a gain of +1.2% for the month. Municipals continued to generate solid gains, returning +0.7% for the month.
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