Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 10/13/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 10/10/14.
October’s Historic Market Performance
October has historically been a month that plays with the mindset of investors and there certainly has been some memorable Octobers over the years. Think back to October of 2008 when the S&P 500 fell 16.79% and further back to 1987 when the infamous “Black Monday” occurred and sent the Dow Jones Industrial Average down 22% in a single day. Interestingly, however, is that over the past 31 years, from 1983 – 2013, the S&P 500 has actually averaged a positive return of 0.50% during October with 19 up years and 12 down years. Given that most people tend to remember losses more than gains, it is no surprise that October is generally associated with poor market performance. In fact, October has unfairly had terms like “curse” put after it in headlines and has journalists wondering if investors will be “spooked” by this month’s past returns.
Despite the patterns that appear to exist when analyzing historical market returns, each month is much more likely to be affected by current market events, economic fundamentals and earnings, than it is by past performance. Taking a look at the current environment, there appears to be a good argument for continued growth in U.S. Equities over the intermediate term. The Fed last reported a moderately improving U.S. economy citing a falling unemployment rate, increased household spending and increased business investment. Earnings for the third quarter are expected to increase at a pace of 4.6% and yields on U.S. Treasuries remain low, providing few attractive alternatives than stocks for investors looking to earn a relatively high level of current income. Despite the geopolitical concerns that exist and the weak performance of International equities of late, we believe that there is unlikely to be a downturn in the U.S. Stock Market greater than a “Pullback” (which is defined as a fall in market valuations of between 5% – 10%).
Rather than timing the market in anticipation of short term pullbacks, we believe that it can be more effective to utilize a strategy that involves diversification across different asset classes and sectors. Recognizing that diversification cannot guarantee a profit or protect against a loss, when done properly, an asset allocation strategy can help to limit the amount of downside risk associated with a portfolio fully invested in stocks and provide for pockets of growth to offset losses from potential, negative stock market returns.
Important Information and Disclaimers
Past Performance is not a guide to future performance.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.