Equities
September, known as one of the worst performing month for stocks, enjoyed strong gains this year and ended another strong quarter for equities, especially small-caps. The NASDAQ led for the second consecutive quarter, up 11% compared to an impressive 10% gain for the small-cap Russell 2000 and a gain of 5.3% for the large-cap S&P 500. The S&P 500 is up this year and is poised to post positive returns for the second year in a row. Yet compared to other bull markets, the current bull market is both shorter and relatively subdued. According to Ned Davis Research, “the current bull market could last into 2014, rise by another 30%, yet still appear normal for a secular bull”. A lot has been thrown at the market in the last few years, and every time, it was resilient. The latest concern is the Congressional drama over funding of the government, which has caused a partial shutdown. But the government has been shut down before without major financial-market damage. Next comes the debt-ceiling drama. The debt-limit debacle of 2011 came with a 19% drop in the equity markets. The global credit bubble is deflating and economic recovery continues. Reports show continued slow growth in housing, autos, and jobs.
By most measures, the U.S. market is close to over-valued. Corporate earnings have slowed to a forecasted 3.5% for the third quarter. This is a far cry from the negative earnings last seen in 2008. In fact, the negative earnings of the 4th quarter 2008 had never happened before in the history of the S&P 500. And remember those 2008 earnings will soon fall off the five-year total to boost the sum.
Right now, the most attractive stocks are those that are undervalued. This is what I am seeking out right now for the portfolios of my clients.
Fixed Income
Bond funds bounced nicely in September, ending a four-month losing streak. Interest rates fell in September (the 10-year Treasury yield ended at 2.64%) as the Fed indicated it would not cut its stimulus efforts for now. Investment-grade corporate bonds returned 1.3% in September, but are down about 1.0% on the year, according to the Barclays U.S. 5-10 Year Credit Index. High yield bond funds rose slightly less than higher-grade bonds (about 1%), but have better returns for the year (up about 2%). In comparison, the Barclays U.S. Treasury index returned 0.8% in September but is down over 2% year-to date.