Volatility. Stock prices moved with disturbing violence throughout October, as the combination of poor economic data, election uncertainty, large mutual fund redemptions, and forced selling by leveraged market participants drove the US equity market to an intra-day low on October 10 and a closing low on October 27, before it recovered a bit at month’s end. In spite of Congress’s passage of the Paulson bank rescue plan on October 3, uncertainty regarding its implementation and effects also seemed to weigh on the markets. October had two different trading days, the 13th and the 28th, on which the S&P 500 rose more than +10%, but for the month as a whole the index fell –16.8%, bringing its performance for the first ten months of 2008 to –32.8%. Smaller stocks generally suffered even more than larger ones, with the S&P Midcap 400 returning –21.7%, and the Small Cap 600 returning –20.2%. The selling seemed indiscriminate, as value and growth performed about equally badly in each capitalization range. [Index returns: Standard & Poors]
October’s selloff was global. The MSCI Barra EAFE international equity index returned –15.5% in local currencies for the month. Currency movements were a major feature of global markets during October, as investors seeking safety in short-term US Treasury securities bought dollars. The US dollar rallied to $1.268 against the euro at 10/31 from $1.408 on 9/30. It also improved to $1.617 against the pound Sterling at 10/31 from $1.780 on 9/30. Across the Pacific, though, the yen strengthened even more than the dollar, so the US dollar ended October at 98.28 yen, down sharply from its level of 105.94 at 9/30. Apparently, during October many traders closed out “yen carry” trades, in which they had borrowed yen at low interest rates to buy higher-yielding assets in other currencies. The unwinding of a large volume of these trades seemed to be the main engine of so much buying in yen. With the currency movements, the EAFE index returned –20.2% in October, bringing its year-to-date performance to –43.5%. [Index returns: MSCI Barra; currency rates: US Federal Reserve]
Late in the month the Federal Open Market Committee lowered its target for the Fed Funds rate by half a point to 1.00%. This action largely reflected the movements of short-term interest rates in general. By the end of October, the yield on a one-month US Treasury bill had fallen to 0.12%, a level reflecting a desire more for safety than for return. Short-term US Treasury rates fell in general, and the two-year Treasury note ended October at a yield of 1.56%, down from 2.00% on September 30. Nearly all other interest rates rose, however, with the 10-year US Treasury yield rising to 4.01% at 10/31 from 3.85% at 9/30, and yields on bonds with higher credit risk remaining stubbornly high as well. As a result, the Barclays Capital/Lehman US Aggregate Bond index returned –2.36% for October. [Yields: US Treasury; bond index: Barclays Capital]
Some of the worst market signs we saw during October have finally abated somewhat. Bank lending finally seems to be improving, as 3-month LIBOR, an interbank lending rate that can be a proxy for banks’ willingness to lend, eased from above 4%, where it had stood for most of October, to less than 3.5% at the end of the month, and has fallen to just above 2.5% in early November. [British Bankers Association; Bloomberg]. The price of oil fell by nearly a third, from around $99 per barrel at 9/30 to about $67 at the end of October. Still, data on economic matters like industrial output, consumer spending, auto sales, and unemployment are very weak, suggesting that economic recovery remains some months away.