CAPTRUST Chief Investment Officer
A positive quarter for most asset classes masks a news-heavy period for global investors.
A cursory look at returns across asset classes may leave one thinking that 2013’s third quarter was rather benign from a news flow standpoint. U.S., international developed, and international emerging stocks were all higher, as were U.S. bonds and commodities. While such returns may normally imply a relatively quiet period, the general capital market environment was anything but.
Investors processed several key items during the third quarter. Middle East tensions, the aftermath of a volatile rise in interest rates (and resulting decline in bond prices), concerns about European and Chinese growth sustainability, U.S. government shutdown fears and, most importantly, speculation about a possible slowdown in the U.S. Federal Reserve’s bond buying program were all market drivers. The Syrian conflict relaxed, perhaps temporarily, through diplomatic intervention, and the U.S. bond market stabilized after interest rates endured the largest percentage-point increase in history during the second quarter. European data releases and company earnings reports were mostly positive while China remained more mixed. China also continues to flirt with “rebalancing” away from a more manufacturing- and export-driven economy to one more dependent on domestic consumption, and that transition path may be rocky. The U.S. government partially shut down on September 30, emphasizing political discord that could remain a market driver for the rest of the year.
The Fed’s ongoing purchase of mortgage and treasury bonds is intended to restrain borrowing costs for consumers and businesses and encourage economic growth. In late June, the Fed implied that it would taper its open market bond purchase during the latter part of the year. Capital markets sold off aggressively on concerns the economy was not yet ready for the Fed to remove this stimulus. In the immediate weeks that followed, Fed representatives backed off the taper rhetoric, and markets cheered the bond buying continuation. Even when markets anticipated the Fed would communicate a stimulus reduction in late September, it opted to continue the stimulus program, catching the bond market off guard.
Will further head fakes follow? 2013’s final quarter must first absorb the partial U.S. government shutdown and debt ceiling debates, as well as what is likely to be a telling earnings season across global companies. The European Union has a key summit in late October, and China’s annual party meeting will take place in November. Two key Federal Reserve meetings — first in October and then in December — round out what will likely be an event-filled year end. All of these catalysts can drive markets in addition to the slew of surprises that wait. We are seeing stability in global economic growth and could see further improvement as 2013 concludes.
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