After a disappointing September, U.S. stocks soared to new highs in October, advancing by just over 7%. Returns were largely driven by positive earnings news for Q3, where more than 80% of companies have thus far reported a positive earnings surprise. This figure comes in well above the long-term average of closer to 65%. Fixed income markets ended the month slightly negative, as the curve flattened, with rates at the shorter end of the curve increasing, while the yield on the 30-year bond declined. In the real asset space, commodities performance was strong on an absolute basis (+2.58%), but could not keep pace with U.S. equities, as gains in crude oil were largely offset by price declines in natural gas.
U.S. large growth stocks outpaced their value counterparts by a relatively wide margin in October (+8.66% vs. +5.08%), buoyed by strong earnings and a sharp decline in rates during the latter part of the month. This effectively put an end to the dominance that value stocks had displayed for much of 2021, leading growth by more than 12% just prior to the start of summer. This margin of leadership now stands at just over 2% in favor of growth names, with the Russell 1000 Growth index gaining 24.20% YTD compared to a, still respectable, gain of 22.03% for the value index. However, it should be noted that, despite this relative pullback, value stocks still maintain a return advantage of roughly 6.5% since the start of the reopening trade in September of 2020.
Non-U.S. markets posted strong returns from an absolute perspective, with developed markets gaining 2.46% in USD-terms and emerging stocks advancing by 0.99%. Unfortunately, this was not nearly enough to keep pace with the 7% return of the S&P 500. On a YTD basis, international market performance has been relatively challenged, as a stronger dollar and concerns around China have weighed on returns for U.S.-based investors. That being said, from a valuation standpoint, non-U.S. developed and emerging markets equities continue to be a bright spot in a high valuation world. This is particularly true on the value side of the market, where 10-year CAPE ratios sit below their long-term average for the MSCI EAFE Value and MSCI EM Value indices. Conversely, the S&P 500 currently trades at one of its most expensive levels on record, more than double its long-term average 10-year CAPE ratio.
Despite a near flat finish for the Barclays Aggregate Bond index, October proved to be a volatile month for interest rates. More specifically, investors witnessed rates increase by as much as 24 bps mid-month, peaking at 1.70% on the U.S. 10 year, only to see them fall back to 1.52% by month end. From a shape perspective, the U.S. yield curve ended October 15 bps flatter (10 year minus 2 year) than where it began the month, as short-term inflation concerns manifested themselves in sharp rate increases at the short-end of the curve.
Investment grade credit was the lone bright spot across the fixed income spectrum, gaining 22 bps on the month. While spreads failed to decline from their near historic low levels of just about 80 bps over treasuries, the Barclays Credit index benefitted from its exposure to longer-dated bonds, which appreciated in value as rates at the 30-year point of the curve declined by more than 10 bps.
Commodities had another strong month on an absolute basis (+2.58%), despite trailing the S&P 500. Crude oil was again a major contributor, gaining over 10%, as strong supply/demand dynamics continued to support prices. Natural gas and gold were the only major laggards of note. Natural gas prices cooled off by nearly 10% on the month, but remain higher by more than 90% on a YTD basis, while price gains for gold remained limited, as interest rates rose across the short-to-intermediate part of the curve.
Commodities, at a broad-basket level, are now higher by 32.46% for 2021 vs. a gain of 24.04% for the S&P 500, with outsized gains coming from indexes and managers with higher concentrations in the energy sector.
Closed End Funds
Closed end fund returns were relatively muted on the month, as strong equity market performance was offset by somewhat higher rates and negative NAV performance for lower quality credit. This resulted in a marginal tightening of closed end fund discounts, which ended the month at approximately 1.5% below NAV. However, on a YTD basis, CEF investors have clearly benefitted, as industry-wide discounts have now narrowed by over 400 bps.
iCM’s Tactical Income (TICE) strategy finished October with a gain of 2.40%, slightly outpacing the 2.37% gain of its blended index. This increases the TICE strategy’s YTD return to just shy of 14.5%, an advantage of more than 600 bps versus its asset-weighted benchmark.
Integrated Capital Management, Inc. is an SEC Registered Investment Advisor. Registration does not imply any certain level of skill or training. Monthly “Market Flash” is intended solely to report on various investment views held by Integrated Capital Management. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but should not be assumed to be accurate or complete. References to specific securities, asset classes and financial markets are for illustrative purposes only and do not constitute a solicitation, offer or recommendation to purchase or sell a security.
Past performance is no guarantee of future results. Please note that investments in foreign markets are subject to special currency, political, and economic risks. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged and one cannot invest directly in an index.
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TICE Blended Index comprised of 32% S&P 500/8% MSCI EAFE/38% Barclays Aggregate Bond/20% Barclays Municipal Bond/2% Cash
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