3rd Quarter Market Review By: Gabriel PotterMBA, AIFA® 2012.10.01

Key news stories

The most recent unemployment statistics from September were stalled at a 8.1% but the unchanged rate under represents the severity of the problem.  Few jobs (e.g. 96 thousand in September) are being created.  The rate remains unchanged primarily because older-demographic Americans have been sufficiently discouraged and are no longer looking for work.

In response to the ongoing malaise, The United States Federal Reserve announces another round of bond-buying (QE3).  Similarly, the European Central Banks roll out a potentially unlimited bond-buying plan to save the “irreversible” Euro.  In a reversal from previous activism, the Chinese government is significantly holding back action.  The Chinese are experiencing growing pains as cheap labor gets more expensive, emigration rates fall, and political will runs short in the face of a scheduled power transfer, heightened scrutiny and political scandals.

Equities

In the 3rd quarter, there was a little more recovery of growth over value and a little more strength in large caps over small caps.  Broadly speaking, the past year has been good to US equities after a perfectly flat 2011.  On a relative basis, the past year has strongly favored US equities as a source of organic growth compared to the debt laden developed international markets and export dependant emerging markets.

All index performance values (below) are for the 3rd quarter of 2012.

  • Large Cap Growth - Russell 1000 Growth:   6.11%
  • Large Cap Value - Russell 1000 Value 6.51%
  • Small Cap Growth - Russell 2000 Growth:    4.84%
  • Small Cap Value - Russell 2000 Value:    5.67%
  • Developed International Markets: 6.92% 
  • Emerging Markets - MSCI EM:   7.74%

Bonds

High yields and corporate credit, which tend to correlate more strongly to equities, led the quarter.  The expansion of QE3 added evidence that interest rates would remain low for the foreseeable future, which eliminated a key fear for long duration paper.

  • Barclays Aggregate Bond:  1.58%
  • Bank of America/Merrill Lynch High Yield:  4.59%
  • Barclays Capital US Intermediate Credit:  2.90%
  • Barclays Capital US Government:  0.59 %
  • Barclays Capital US Gov’t/Credit Long Duration:   3.10%

Alternatives

Residential housing shows life signs in the 3rd quarter as some of the largest real estate markets post gains.  The summer was unusually hot & dry.  Widespread drought in the Midwest has lead to a sharp increase in prices for key commodity crops like corn and soybeans.  The drought will have ripple effect on price of livestock-feed and the availability of livestock next year. 

  • Real Estate - FTSE NAREIT All REIT:   1.03%
  • Commodities - DJ UBS Commodities:  9.69%
  • Inflation – Barclays US TIPS:  2.12%
  • Hedge Funds – DJ Credit Suisse Hedge Fund:  2.27% (through 8/31)
Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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