A Bright Quarter

Sean Insights

Investors entered the month of September fearful of past downturns, still haunted by the catastrophic decline in 2008, but yet again, the markets did the opposite of what many were expecting, posting the highest returns for any September since 1939, and the third best single monthly return in 10 years.

The good news could be seen in all sectors of the U.S. stock market. After dipping to its yearly low (1,011) on the first day of the third quarter, the large cap S&P 500 eventually rose 11.29% for the three months ending September 30, putting it in positive territory for the year, with a gain of 3.89%. During the month of September, the index rose 8.92%, which more than made up for the losses registered throughout the rest of the year.

Interestingly, for all of the gloomy news about industrial unemployment in the U.S. economy, the largest yearly gainer was the Industrials sector of the S&P 500, up 11.45% for the first three quarters of the year. The worst-performing sector: energy, down 2.48% going into the last quarter.

Among the various categories of U.S. equities, mid-cap stocks have enjoyed the best returns: the Russell Midcap index was up 13.31% in the third quarter, putting it up 10.97% for the first three quarters of the year. Meanwhile, the Russell 2000 small cap index rose 11.29% in the third quarter, and was up 9.12% for the year.

Some of the stock market gains reflected good news in the economy. The Bureau of Economic Analysis reported on September 30 that it was revising its estimate of second-quarter growth in the economy, up 1.7%, after an increase of 3.7% in the first three months of the year. Corporate profits increased $47.5 billion in the second quarter after rising $148.4 billion in the first quarter.

International investors are beginning to recover some of the losses from earlier in the year. The MSCI EAFE index, which measures the composite returns of the developed nations (although it excludes Canada, for some reason) was up 15.79% for the quarter, but the index is still in negative territory overall for the year, down 1.25% heading into the fourth quarter. European stocks rose 18.87%, but were still down 2.98% for the year. The MSCI Far East index rose 7.05% for the quarter, up 3.10% for the year as of September 30.

Meanwhile, emerging markets are still booming. The MSCI Emerging Plus Frontier Markets index was up 21.53% for the quarter, putting it up 15.07% for the first three-quarters of the year.

Alas, our crystal ball wasn’t quite good enough to bet your entire portfolio on Sri Lanka’s ASPI Index (up 50.3% for the quarter), or Peru’s Indice Selectivo Peru-15 (up 25.4%), however, we were fortunate enough not to have bet heavily on Iceland’s OMX FO Price Index (down 22.8% for the quarter), or Nepal, whose NEPSE Index fell 14.4% these last three months.

Real Estate investment trusts, portfolios of real estate property that trade on exchanges, also posted aggregate gains. The Dow Jones All Equity REIT index, which tracks 155 real estate investment trusts, was up 12.5% for the third quarter, helped by perceptions that credit may be becoming more available to commercial real estate, which depends more than most industries on credit supplies to refinance debt payments and fund new acquisitions. The NAREIT index rose 7.46% for the quarter, from 2,862.01 to 3,075.61, up from 2,711.15 at the start of the year.

In the commodities sector, the Standard & Poors Goldman Sachs Commodity index rose 8.27% for the three months ending September 30, but was still down 3.87% for the first three quarters of the year. Gold continued its remarkable rise, up 18.75% through September 30, while silver rose even farther, up 28.56% for the year’s first nine months.

Treasury Bond prices rose slightly as the yield on 10-year maturities fell from 2.95% on June 30 to 2.51% at the end of the quarter. Remarkably, the yield on 6-month Treasury notes is still hovering at 0.19%, and returns on shorter-term paper are even lower. Yield to maturity on 20-year Treasuries stand at 3.38%, and the longer 30-year maturity issues were yielding 3.69% as the quarter ended.

Meanwhile, it’s helpful to remember that at the start of the quarter, people were questioning the viability of U.S. and global markets after the near-meltdown of Greece, Portugal, Spain and other Southern European economies. Each quarter, each year, seems to bring a new thing to worry about, but looking longer term, U.S. equity markets have managed to post long-term gains despite some fairly serious disruptions, including World War II, the Cold War, the conflict in Vietnam, stagflation and the oil shocks of the 1970s, the market crash of 1987, the bursting of the tech stock bubble, and the subprime mortgage meltdown and collapse of Bear Stearns, Lehman Brothers and AIG in 2008.

Indeed, if you look at the long-term movements in the stock market since the Great Depression, all of those events, which seemed pretty dire at the time, look like blips on the screen, small dips in the long-term growth of value in American and global enterprises.

There is no doubt that there will be other events in the future which will seem to endanger – or at least derail – the long-term growth of capitalism and the increase in worldwide prosperity, but based on the history of the past two centuries, one could well feel confident that whatever challenges await, people in all sectors of the U.S., and increasingly the global, economy will find ways to create additional value and thus increase shareholder value.

So what will the fourth quarter hold? Short term market movements are just not that predictable, despite the best efforts of countless investors and institutions. Despite all of my attention to aligning clients portfolios with their long-term goals, and diversifying those portfolios as best we can, my fundamental belief is that ownership type assets that participate in the growth of the world’s economies will rise more often than they fall and provide the long term returns necessary to sustain a 30+ year retirement, regardless of what dire thing you may read about in the paper from quarter to quarter.

As always, please let me know if you have any questions or if there is anything I can do for you.