Developed Markets Plateau in October
In the month of October, international developed stock markets fell -3.93%. Japan and Pacific ex Japan recorded returns of -1.60% and -0.57%, respectively. The U.K. and Europe ex UK lagged the broader market. Year to date returns have bounced back considerably since the March lows. The U.S. market is up 4.01% while international developed markets in the aggregate are still down -10.78%. Aggregate economic activity is steadily recovering. Stocks related to travel, tourism, hospitality, and energy continue to face challenges, but may benefit from continued progress on a COVID-19 vaccine.
Emerging Markets Positive
Broader emerging markets posted a 2.38% return for the month. China and Mexico recorded returns of 5.29% and 2.32%, respectively. Russia and Brazil lagged other markets in October. The broader emerging markets are now in positive territory for the year, up 0.25%. The Chinese equity market is primarily responsible for this performance, recording a YTD return of 22.61%. Retail sales and foot traffic in China have improved since March and are now positive year over year. The implementation and enforcement of proper COVID-19 safety measures can help increase business activity.
Utilities and telecommunications recorded returns of 1.91% and 1.90, respectively, in October. Information technology and energy lagged other sectors. Information technology companies have now lagged in successive months, which may have been due to their extended valuations and the increasing probability of a COVID-19 vaccine. Defensive sectors such as materials and telecommunications are now positive for the year.
Value Outperforms Growth
In October, value outperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of -3.17%. Relative valuations between value stocks and growth stocks are still near historical highs based on many different valuation metrics. Growth stocks have held up better this year, but their future earnings may not justify the higher valuations. Momentum and large-cap growth strategies performed well during the past one- and five-year periods.
Value Outperforms in Foreign Markets
In the international developed markets, value outperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of -3.87% while small-cap emerging market stocks posted a return of -1.22%. Foreign momentum strategies have performed well year to date and over the past twelve months.
Interest Rates to Remain Low
In October, the three-month Treasury bill index returned 0.01% for the month. Interest rates on Treasury bills and money market funds are close to 0%. The Federal Reserve indicated they will keep interest rates at current levels until inflation picks up, which may take years. Savers may face low rates for a long period of time, which will negatively impact retirees and people close to retirement. The CPI decreased by -0.80% through September.
U.S. Agg Flat in October
The returns of deflationary hedges were mostly negative for the month. Long-term government bonds returned -2.98% but are up 17.52% year to date. The Bloomberg Barclays U.S. Agg Bond Index returned -0.45% in October. Riskier forms of credit such as high-yield bonds and leveraged loans were positive for the month.
Oil Prices Continue to be Volatile
Inflation-sensitive investment returns were mostly negative for the month. Gold bullion posted a return of -0.27%. Gold bullion is up 24.24% YTD, outperforming most other assets. Gold miners have also outperformed as they provide levered exposure to the gold price. Domestic and foreign REITs are still down approximately -20% for 2020. WTI crude oil dropped by -11.54% in October but may bounce back as more progress is made towards a COVID-19 vaccine.
U.S. Dollar Mixed
Over the past three months, the U.S. dollar depreciated against the Japanese Yen, Canadian dollar, Indian Rupee, and Mexican Peso. The Euro notably depreciated by about -1.31% versus the U.S. dollar. Over the past year, the U.S. dollar has depreciated against most major currencies except the Mexican Peso, Indian Rupee and Canadian Dollar. The continuation of large U.S. fiscal stimulus packages may weigh on the U.S. dollar in the medium-term to long-term.
Brandon Yee, CFA, CAIA – Research Analyst
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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