October 2009 Recap

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The S&P 500 snapped its streak of seven consecutive monthly gains as investors grappled with the sustainability of the global economic recovery. The higher-than-expected report on third quarter GDP confirmed that the economy is recovering as did the Index of Leading Economic Indicators, which beat estimates by rising 1% in September and marking the sixth straight month of gains.

Too, earnings season helped confirm the recovery is taking hold. Management commentary has been cautiously optimistic, with many companies suggesting the worst is behind us, but warning the recovery remains bumpy. The reaction to positive earnings has been more muted than in the previous quarter since revenue results failed to impress. Investors had been looking for revenue growth, rather than cost-cutting, to boost profits.

Investor enthusiasm surrounding an improvement in the economy had pushed stocks to 2009 highs early in the month, but all that evaporated as the month came to a close. On cue, the VIX Index, also known as the market’s “fear gauge,” jumped to its highest level in nearly four months, moving above 30 near the month’s end. In addition to the sustainability of the economic recovery, investor concerns include the removal of massive fiscal and monetary stimulus, the weak U.S. consumer, the actual and proposed government spending, and the weak U.S. dollar.

The relationship between the dollar and stocks was incredibly tight throughout the month, with days of dollar strength causing stocks to fall and vice versa. Other asset classes such as gold and energy prices were also closely correlated with the dollar.

The riskiest investments were the month’s worst performers, a reversal from the last seven months. Smaller capitalization stocks trailed their larger counterparts, while Financials and Materials sectors were the worst performing sectors in the S&P 500.

Energy was the top performing sector, with a weaker U.S. dollar pushing up prices of fuels such as oil, natural gas, and coal. The only other sector to finish in the black was Consumer Staples, which benefited from cheap valuations relative to the rest of the market as well as its defensive nature.

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Peter J. Lazaroff, Investment Analyst