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Market Insight - October 2012

Financial markets surged in the third quarter of 2012, as investors looked past employment and earnings concerns, and focused on the European Central Bank’s plan to stabilize the euro, and the Fed’s open-ended commitment to quantitative easing. This environment benefited both stocks and bonds, and provided strong returns for the globally balanced investment approach our clients favor.

The Numbers

The Dow rose 4.3% in the third quarter, 10% year to date. It has posted gains in 11 of the past 12 months, for the first time in 50 years. The S&P 500 added 5.8% in the third quarter and 14.6% year to date, while the Nasdaq gained 19.6% for 2012. Smaller stocks, measured by the Russell 2000 and S&P Small Cap 600, are ahead 13% and 12.8% respectively, for the year. International investments also experienced a strong recovery; the MSCI EAFE index of developed country markets gained 6.9% for the quarter, 10.06% year to date, while the MSCI emerging market index added 7.44% for the quarter, and 11.14% year to date. Investment real estate, measured by the Cohen & Steers Realty Fund, was flat for the quarter, but ahead 13.41% for the year.

Scary October?

Investors have more to worry about than ghosts and goblins; October is a month we often associate with market crisis. While September is historically the worst month for stocks, (the Dow has averaged September losses of 1.4 percent over the years since 1929) many recent high profile point declines have occurred in October. Over four October days in 2008, the 7th, 9th, 15th and 27th the Dow lost 508 points, 678 points, 733 points, and 514 points respectively. October figures in five of the worst ten percentage declines of the Dow as well. In 1987 the Dow fell 22.6% on the 19th, and 8% on the 26th. In 1929 it lost 12.8% on the 28th, and 11.7% on the 29th. On October 15th 2008 the Dow fell 7.9%. (We’ll breathe a sigh of relief when the last trick-or-treater goes home.)

There are still serious obstacles ahead.  The fiscal cliff, creeping recession in Europe, conflict in Syria, an intransigent Iran,  Afghanistan, our own elections and slowing growth in China; all have potential to roil markets. But the chorus of voices forecasting the decline and collapse of our economy and our markets, so strident over the last few years, sound increasingly thin and shrill. Three and a half years ago the Dow stood at 6,547; it is now over 13,000.

We know markets move forward in cycles. Global instability, disappointing economic news, concerns over rising deficits are just a few of the events that can trigger sharp sell-offs and corrections, and we are most vulnerable when expectations are high.  However, investment discipline and consistent strategy based on fact, not emotion, can mitigate their impact on long term return. While the last ten years have been extremely challenging for financial investors, there is no evidence to justify projecting that lost decade forward. In fact, as frustrated savers reverse the flow of funds into banks and regain confidence in financial markets, it should fuel demand for stocks and bonds, providing a strong support for the gains so far, as well as favorable conditions going forward.

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