Quarterly Recap - 3rd Quarter 2013

U.S. and foreign stocks rebounded in September, extending third quarter and YTD gains as central banks kept their economic stimulus programs intact. Despite a widely expected reduction in the Federal Reserve's $85B monthly asset purchase program, FOMC policymakers surprised global markets on September 18 with a "no taper" stimulus decision. Fed Chairman Ben Bernanke cited a recent "tightening of financial conditions" that could threaten the pace of recovery as a reason for the decision, which led to the biggest one-day price jump in 10-year Treasury notes since 2011, triggering a 0.5% yield decline from its 3% two-year peak on September 3. Stung by concerns over the looming government shutdown, the S&P 500 retreated 2.6% during the second half of September, paring an earlier 5.7% gain. Overall, equity valuations rose as a third straight year of earnings growth continued to lift investor sentiment.

Smaller capitalized U.S. companies outperformed large-cap stocks as the Russell 2000 Index, a proxy of small-cap equity performance, rose 6.4% in September, rallied 10.2% during the third quarter and has returned 27.7% YTD. In a turnaround, growth stocks widely outperformed value for both the month and quarter as the Russell 1000 Growth Index rose 4.5% last month whereas the Russell 1000 Value Index returned 2.5%. During the third quarter, the Russell 1000 Growth Index advanced 8.1%, while the Russell 1000 Value Index gained 3.9%. All ten major sectors rallied in September with Materials (+5.7%), Consumer Discretionary (+5.4%) and Healthcare (+4.4%) gaining the most. For the quarter, Healthcare (+10.3%) and Materials (+8.9%) led, while Energy (-4.4%) was the only sector to decline. On a YTD basis, Consumer Discretionary (+29.1%) and Telecom (+28.5%) are this year's best performing sectors.

Developed markets outside the U.S. and Canada, as measured by the MSCI EAFE Index, widely outperformed domestic indices during the month (+7.4%) and quarter (+11.6%). The EAFE Index strengthened after the mid-August announcement that Europe's 17-nation euro-zone emerged out of its 18 month recession. Emerging markets, as measured by the MSCI Emerging Market Index, also reversed course, posting a 6.5% gain last month after falling 1.7% in August. Emerging markets also rose on a quarterly basis, returning 5.9% during the 3Q versus an 8% pullback during the 2Q and trimmed its YTD loss to 4.1%. Commodities were a mixed bag during the quarter. Gold rebounded over 8.4% from its $1,200/oz. bear market low at the end of the second quarter. Crude oil futures fell 4.9% in September while gaining 6% on the quarter.

In the bond market, the Barclays U.S. Government Bond Index snapped a three quarter decline, returning 0.7% in September and 0.1% during the third quarter. The yield on benchmark 10-year U.S. Treasury notes ended the third quarter at 2.64%, up 12 basis points from the start of the quarter. At the other end of the credit quality spectrum, non-investment grade corporate bonds returned 1% in September and 2.3% on the quarter, as measured by the Barclays U.S. Corporate High Yield Index. Higher quality investment grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, gained 1% on the month and 0.6% during the quarter. The Barclays Municipals Index posted its best monthly gain since January 2012, returning 2.2% in September, trimming its 3Q downturn to 0.2%.

1. Morningstar Direct (all performance percentages are total return based, which include reinvested dividend, interest)
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