The ACM Journal 2013 Q3

The third quarter of 2013 started out on a positive note, with strong gains in the stock market during July. However, uncertainty over whether or not the Fed would continue to intervene in the capital markets, economic risks in the emerging markets, and a Syrian situation that looked ready to boil over, all took their toll on markets in August. Heading into September, the financial media continually reminded of the dreaded “September Effect”.

Much Ado About Nothing
Historically, September has been the worst month for stock market returns. Since 1896, the average return for the Dow Jones Industrial Average has been a loss of 1.09% during September. All other months combined have posted a positive return of 0.75%, on average. There are theories why this has occurred, but none of them are entirely credible. In any event, it makes for interesting news stories each autumn. After all the hand-wringing, returns during September this year were nothing short of spectacular. In fact, many market indices hit new highs during the month.

At the end of the quarter, most segments of the stock market posted very strong returns (see nearby chart). Domestic stocks are up significantly, both for the third quarter, as well as year-to-date. Smaller stocks have shown the best returns, which is somewhat perplexing, given their relatively high valuation levels.

All’s Well That Ends Well
International stocks broke out of their funk in the third quarter and posted the strongest returns of any asset class. It seems we are past the point of crisis in Europe, and perhaps investors are waking up to the fact that valuations overseas are quite attractive. We’ve been expecting an international stock rally for some time. It is too soon to tell if this is the beginning of a significant rally, but the valuation disparity between foreign and U.S. stocks cannot last forever. Emerging market stocks also have low valuations currently, but have not rebounded the way developed market foreign stocks have. Tighter monetary policy in the U.S. could have a negative impact on emerging market economies because there would not be as much money sloshing around the globe. With the fear that the Fed will soon curb its stimulus programs, investors have proactively exited the emerging markets. Again, valuations appear very attractive, so we are excited about the long-term prospects in the emerging markets.

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