Economic Backdrop

As expected, monetary policies for the world’s central banks remained on divergent paths. The U.S. Federal Reserve (Fed) released its Federal Open Market Committee (FOMC) meeting notes two days before the end of the month. The FOMC noted that the U.S. employment situation continued to modestly improve. Given this, and with inflation below target, the FOMC announced it was ending its asset purchase program (but would continue reinvesting proceeds) while maintaining historically low interest rates. The move was widely anticipated and still leaves the Fed with a generally accommodative monetary policy. It was status quo for the Bank of England (BOE) as the Monetary Policy Committee (MPC) once again voted 7 – 2 in favor of leaving rates unchanged at 0.50%. The majority voters, which included Governor Mark Carney, stated, “A premature tightening in monetary policy might leave the economy vulnerable to shocks, with the scope for any stimulus that subsequently became necessary being limited by the effective lower bound on Bank rate.” The European Central Bank (ECB) began making asset purchases under a plan it outlined in September. Additionally, the ECB conducted stress testing on 130 large European banks; the results were largely positive as only 13 banks failed the stress test. Finally, the Bank of Japan (BOJ) provided a jolt to markets on the final day of the month by ramping up its asset purchases. While the timing of the decision was surprising (expectations were that this would come later in the year or even 2015), the eventual increase was widely anticipated.

The U.S. unemployment rate fell to 5.9% in September despite expectations for a flat month. Average hourly earnings were unchanged, regardless of forecasts for a continued rise. The U.S. economy expanded at a 3.5% annual rate in the third quarter, reaching the top end of expectations, but with less vigor than the prior quarter. Price increases, meanwhile, slowed to 1.3% in the third quarter. Personal incomes grew 0.2% in the U.S. during September, while consumer spending contracted by 0.2%. The prices of consumer expenditures, meanwhile, rose 0.1%. U.S. housing data remained mixed as sales of existing homes increased in September, more than offsetting August’s decline. The change from a year earlier, however, was still negative. The overall improving economic situation in the U.S. gave the Fed confidence to end its asset purchase program.

U.K. economic growth moderated during the third quarter, with a preliminary reading of 0.7%, as expected. However, the gain was slightly lower than that of the second quarter, pulling year-over-year growth down to 3.0%. Retail sales fell in the U.K. during September, despite expectations for a flat month. A steep slump in clothing purchases, likely rooted in extended summer weather conditions, led the decline. U.K. manufacturing appeared to decrease in October, as reflected in survey results from the Confederation of British Industry. The latest report showed deteriorating export orders, in contrast with positive (albeit slowing) output growth. Producer prices fell in the U.K. during September, continuing the prior month’s pace of decline for both input and output prices. A surprisingly steep fall in input prices was attributable to large drops in imported food and oil prices. U.K. consumer prices were unchanged in September despite expectations for an increase and a notable jump in August. Despite reasonably strong growth, the below-target inflation and relatively weak underlying data have combined to keep potential BOE rate hikes at bay. House prices in the U.K. rose during October, according to Nationwide, after dropping in September. Even so, the year-over-year increase slowed to its lowest rate since early 2014, indicating the BOE’s plan to moderate a potential housing bubble may be having an effect.

Consumer prices in the Eurozone rose in September on an annualized basis, but by less than in the prior month. Romania, Finland and Austria increased the most, while Bulgaria, Greece and Hungary fell the furthest. German producer prices were unchanged in September, as anticipated. A nine-month trend of flat-to-declining prices continued to push the year-over-year change lower. The European Union unemployment rate remained at 11.5% during September, as expected. Germany and France remained the same as the previous month, while joblessness increased in Spain and receded in Italy. Continued weak economic growth, inflation and employment reports drove the ECB decision to engage in asset purchases.

Market Impact

Fixed-income returns remained volatile. Emerging-market debt (EMD) was a top performer after lagging in September. Despite the strong performance, the volatility carried over into EMD resulting in disparate returns across countries and currencies. External debt generally benefitted from U.S. dollar strength but local currency debt was also strong and nearly matched the returns of external debt. U.S. high-yield bonds rallied back from a disappointing September to also notch strong returns. The overall bond market, as measured by the Barclays Global Aggregate Bond Index, was essentially flat as the index returned a meager 0.01%. Corporate bonds outperformed global treasuries.

Equity market performance was mixed with the U.S. leading the way for major markets thanks to continued U.S. dollar strength and better economic growth relative to other regions. Asia was mostly positive with the exception of Japan, while Europe was mostly down. The BOJ’s continued efforts to stave off deflation and spur growth gave stocks a late month lift, but the effects of this were more than offset by the weakening yen. Emerging market performance was mixed, led by Turkey and Asian markets (China, India and Taiwan). Conversely, market performance in Latin America (except Brazil which managed a modest positive return) and Russia was labored as crude oil prices remained on a downward trajectory. Russia has also struggled with a persistently weak ruble.

Index Data

  • The Dow Jones Industrial Average Index rose 2.16%.
  • The S&P 500 Index increased by 2.44%.
  • The NASDAQ Composite Index advanced by 3.09%.
  • The MSCI AC World Index, used to gauge global equity performance, increased by 0.70%.
  • The Barclays Global Aggregate Index, which represents global bond markets, rose by 0.01%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index”, decreased in the month as a whole, moving from 16.31 to 14.03.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $91.16 a barrel at the end of September to $80.54 on the last day in October.
  • The U.S. dollar strengthened against the euro, sterling and yen. The U.S. dollar ended October at $1.25 against the euro, $1.60 versus sterling and at 112.11 yen.


This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

There are risks involved with investing, including loss of principal. Current and future portfolio holdings are subject to risks as well. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Narrowly focused investments and smaller companies typically exhibit higher volatility. Bonds and bond funds will decrease in value as interest rates rise. High-yield bonds involve greater risks of default or downgrade and are more volatile than investment-grade securities, due to the speculative nature of their investments. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

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