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Capital Markets Recap - October 2018

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Summary

  • U.S. equities saw a significant pullback in the month as end-of-cycle fears had the market exiting risk assets. Economic data remains positive, pointing to low and decreasing unemployment (3.7%), rising wages and salaries (up 3.1% YTD) leading to manufacturing and services PMI beating expectations, and an increase in real GDP (up 3.5% in 3Q). Still, investors are forecasting less accommodative fiscal policy leading to rising inflation and a more aggressive Federal Reserve (i.e. higher interest rates).
  • International and emerging market equities posted negative returns in October. Manufacturing in the U.K. slowed as new orders and employment declined for the first time in 27 months. Eurozone business growth slowed and optimism declined further, signaling expectations of continued deceleration in future growth.  Production and business confidence in China fell amid concerns over the ongoing trade dispute with the U.S. and concerns that the Chinese economy is slowing faster than expected.
  • Fixed income investments were slightly negative for the month, coinciding with the increased equity market volatility. Yields increased as the Treasury Department announced it would fund budget deficits by raising the size of its bond auctions.  Municipal bond funds have seen outflows for five consecutive weeks, with investors readying for potential interest rate hikes.

U.S. Equities

  • Broad U.S. stocks were significantly negative (down -7.4%) for the month, but still managed positive returns on a year-to-date basis (up 2.4%).
  • Size – Small-cap stocks (-10.9%) underperformed both large-cap (-7.4%) and mid-cap (-8.3%) equities during the month, but large-caps continued to lead on a year-to-date basis (2.4% vs. -0.6% for small caps).
  • Style – Value stocks (-5.5%) outpaced growth stocks (-9.2%) in October and but growth stock continued to significantly outperform on a year-to-date basis (6.2% versus -1.5%, respectively).

S&P 500 Sector Returns for October 2018

Looking Ahead 

  • The recent market volatility and uncertainty can move investors to the edge of their seats. Stock market declines are a normal part of equity investing and can be viewed as opportunities to tax-loss harvest or rebalance portfolios back to target asset allocation weights.  
  • Corrections can be painful, but they help bring market valuations back in line with historical averages. It is not time to panic but to stay the course and refocus on long-term investment goals and objectives.  Timing the market is difficult, if not impossible, over long periods and the long-term investor achieves success by investing in a globally diversified portfolio of stocks and bonds.
Sources: Morningstar, Inc., Barclays Capital, Russell and MSCI, U.S. Bureau of Labor Statistics, The Conference Board, IHS Markit, The Federal Reserve (central bank of United States), The Bureau of Economic Analysis (U.S. Department of Commerce) & U.S. Department of Treasury

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