October proved to be a month of high drama for investors as a result of the events in Washington. The partial shutdown of the federal government and the debacle over raising the debt ceiling caused considerable uneasiness in the financial markets at times. While seasoned experts will say that there was never a doubt that at least a stopgap deal would be reached regarding the government’s fiscal situation, markets clearly do react to uncertainty as shown by the steep stock market decline early in the month followed by a positive surge as uncertainty dissipated.
For the month most major stock market indices showed significant gains with the broad U.S. market up in excess of four percent. Foreign markets also advanced with overall gains in the three to four percent range. Developed markets stocks – U.S. and foreign – have been the stellar performers in most portfolios this year with returns generally in excess of 20 percent. Bonds also performed well in October continuing to recover ground lost earlier in the year. Corporate bonds performed especially well with returns on intermediates in the area of one percent for the month putting them on track for a positive 2013 despite the significant decline in Q2.
In the wake of recent events the Fed appears to be taking a cautious approach, maintaining its present strategy of quantitative easing for now. Although economic data from governmental sources has lagged due to the shutdown, data from private sources show solid economic growth over the recent period despite the predicted effects of reduced government spending. While Washington’s recent actions have soured public sentiment, and the economic effects of the shutdown cannot yet be fully quantified, the available data does seem to show an economy that has made it through this period remarkably well and the markets are reflecting that fact.