Hurricane Sandy stamped a tragic exclamation point on the month of October, as it raged through New York City and the surrounding regions, shuttering the New York Stock Exchange for two days. As the storm-ravaged areas begin their challenging recovery process, our thoughts are with those who are struggling at this time and are striving to return to “business as usual.” Markets were less volatile during the month than the weather, with risky assets sliding modestly, as investors turned their attention to the imminent US presidential election and the looming “fiscal cliff.” Economic data were a mixed bag, as US housing continued to show signs of recovery and consumer confidence improved, even as business investment trailed off and unemployment remained stubbornly high. US large company stocks sold off less than small caps while value-centric issues held up better than shares of higher-growth companies. Overseas markets modestly outperformed the US. With Treasury yields range-bound, credit markets continued to post good results, particularly emerging markets debt. Separately, commodities sold off across the board amid weaker growth prospects.
As we enter the month of November, we await the outcomes of key events, starting with the US general election. The resolution of the currently too-close-to-call presidential race, combined with pivotal senate and house contests, should provide some clarity on how the array of automatic spending reductions and expiring tax cuts will be addressed. Furthermore, the Chinese communist party congress kicks off November 8, marking the transition to new leadership in this economically vital country. The Euro-zone remains vulnerable to negative headline risk as it appears to move towards greater integration of banking systems and fiscal policy. Finally, there is greater potential for flare-ups in the Middle East in the post-US election period. In this highly uncertain environment, NEPC stands ready to work with clients to evaluate how best to balance portfolio exposures to achieve long-term asset growth while protecting against increased volatility. We can also help assess the costs and benefits of deploying specific risk-hedging strategies for investors with particular short-term vulnerabilities to market sell-offs. At the same time, we are focusing on identifying opportunities in more attractively priced markets – such as European shares, emerging markets stocks and local currency debt – and less efficient segments such as complex credit securities and direct lending strategies.