To many of us in the financial industry, and those invested in the capital markets, October seemed like an eternity.  It was an extraordinarily volatile period in which no equity asset class was left unscathed.  The MSCI World Index (an index representing the aggregate of the stock markets of all developed nations) suffered its worst monthly decline on record, with a loss of over 20%.  While the final four trading days of the month saw a significant rebound in most of the equity asset classes, the full-month results were still painful.  Below are the returns of various individual asset classes for the month of October and Year-To-Date:

INDEX                                                   October               YTD

Commodities                                       -21.52%                -28.07%

Emerging Markets                               -27.22                   -52.27

High Yield                                            -12.37                   -23.08

International Large Cap                       -20.43                   -44.27

International Small Cap                       -24.00                   -46.25

Real Estate                                          -31.50                   -32.50

U.S. Large Cap (S&P 500)                    -16.80                   -32.75

U.S. Large Value                                  -17.31                   -32.90

U.S. Small Value                                  -19.28                   -24.27

Commodity prices were driven lower in October by concerns that the global recession will weaken demand.  U.S. large cap stocks fared somewhat better than other equity asset classes.  Small cap stocks were under intense selling pressure from hedge funds, and international stocks were hurt by the strength of the U.S. dollar as well as deteriorating earnings prospects in their home markets (for an explanation of the impact of currencies on international equity returns, please see our prior commentary at the following link: http://www.heritageinvestment.com/clientupdatesDetailArch.asp?sysId=9. 

Despite the carnage in the equity markets, there were significant improvements in other areas later in the month.  Intervention in credit markets by governments around the globe led to a significant decline in interbank lending rates, and direct government investments secured the stability of several major banks.  Concerns over “financial meltdown” have abated, and the attention of the markets now appears to be focused on the length and severity of the inevitable recession.

After a difficult month like October, it is critical to keep in mind that great bear markets lead to great bull markets, and that discipline will be rewarded.  Equity markets tend to be forward-looking, and we can expect that the stock markets will turn higher long before the underlying global economies do.  As always, we are available to address your questions and concerns.