A Third Quarter Recap
Stock Market
The U.S. stock market, as measured by the S&P 500 Index, posted its first quarterly loss since the second quarter of 2010 and its largest quarterly decline since the depths of the Great Recession in the fourth quarter of 2008 with a loss of 13.9% in the third quarter of 2011. The Index had increasingly larger declines in each month of the third quarter, with the 7.0% decline in September marking the fifth consecutive monthly decline for the Index and the largest one-month decline since the 8.0% decline in May 2010; the Index declined 2.0% in July and 5.4% in August. Some of the same issues that impacted the market during the second quarter of 2010, notably the European debt problems, had a similar impact in the third quarter of 2011.
For the year thus far, the S&P 500 Index has posted a -8.7% return. The third quarter was a battle between the strongest quarter of economic growth this year and the increasingly negative investor and consumer sentiment. Economic data, while not pointing to robust economic growth, suggested the economy continues to expand, albeit at a painfully slow pace that is well below historical averages at this point in an economic recovery. In that sense, the slow pace of growth probably feels like a recession to many investors. Those feelings were reflected in consumer and investor sentiment surveys that were decidedly pessimistic in the third quarter. However, the gap between what investors say they are doing (i.e., consumer sentiment) and what they are actually doing (i.e., consumer spending) is wide. On balance, negative sentiment overwhelmed the market in the third quarter
and remains an overhang for investors as the fourth quarter begins.
In dissecting sector performance of the U.S. equity markets, defensive sectors generally outperformed cyclical sectors in the third quarter. Utilities was the only sector to post a gain in the third quarter with a return of 1.6%. Utilities is the best performing sector in the S&P 500 Index yearto-date with a return of 10.7%. With the stock market lower and interest rates below 2.0%, investors have looked to the Utilities sector given its defensive nature and healthy dividend yield of approximately 4.4% (as of September 30, 2011). The notable outperformer among cyclicals in the third quarter on a relative basis was the Technology sector, which posted a decline of -7.7%. The performance was notably worse among the other cyclical sectors – Energy, Materials, Industrials, Financials – which all declined more than 20% in the quarter on concerns of a global economic slowdown.
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