Mutual fund investors took modest losses in October after the market's first two-day, weather-related market shutdown since 1888. All the while, the market sat in a wait-and-see mode ahead of the presidential election and digested a wave of disappointing third-quarter earnings reports.
Mid-cap value funds outperformed all size and style funds by losing the least, -0.20%, in October and 12.66% year to date, according to Morningstar. Large-cap growth funds, -3.00%, lost the most. Small-growth fell 2.76%.
TheSPDR S&P 500 ETF ( SPY ) shed 1.82%, closing the month at 141.35, down 4% from a four-year high. It remains ahead 14.29% year to date. TheSPDR Dow Jones Industrial Average ( DIA ) fell 2.44% in October while gaining 9.33% year to date. The tech-heavyPowerShares QQQ ( QQQ ), tracking the 100-largest companies on the Nasdaq, lost 5.28% and surged 17.13% over the same periods.
S&P 500 Earnings
With 54% of S&P companies having reported third-quarter results, earnings fell 1.3% year over year -- the worst showing in nearly four years, according to Thomson Reuters. More than 60% topped earnings expectations but fewer than 40% have beaten on sales.
"Earnings season in the United States has been disappointing, and global economic growth remains slow," Charles Schwab's chief investment strategist Liz Ann Sonders and her colleagues wrote in a client note. "But there are signs of hope as U.S. economic indicators have been trending higher; excessively optimistic sentiment has been worked off; and we're closer to a resolution of the election, and a potential fix to the fiscal cliff. We believe this is setting up for a renewed uptrend in stocks after some continued near-term volatility."
Despite the estimated $30 billion in damages, economists say Hurricane Sandy's impact on the economy overall will be minor. Damages amount to 0.2% of the country's gross domestic product, and rebuilding will be spread over months if not years.
Real Estate Leads Sector Funds
Global real estate funds, +1.51%, lead all sector funds as mortgage rates fell to their lowest in 40 years. It suggests the Federal Reserve's move to keep interest rates low through mid 2015 and buy $40 billion a month in mortgage bonds to boost home buying is working out as planned. Data overwhelmingly shows the U.S. housing market has recovered. The S&P/Case-Shiller index of home prices has risen for seven months straight as of August and is up 2.0% year over year. But the index remains nearly 30% off its 2006 high.
In September, new home sales jumped to their highest level since July 2008. The homeowner vacancy rate, at 1.9%, is the lowest in seven years, while the renter vacancy rate of 8.6% is a 10-year low, according to Ned Davis Research.
"Excess housing supply has now been eliminated and is back to its historical trend," wrote NDR in client note. Short sales and foreclosures have been declining. New home construction averaged 730,000 annually this year, far below the normal replacement rate of 1.3 million a year owing to population growth and damage.
"Housing starts remain significantly below normal, raising the potential for activity to trend up for the next several years," wrote High Frequency Economics.
Housing trends likely boosted consumer confidence. Consumer discretionary funds lost 1.26%. Retail sales surprisingly rose 1.1% month over month in September, bouncing back from negative readings during the summer.
Technology fared the worst among sector funds, losing 5.7% in October. Techs' reported and estimated earnings in the third quarter rose just 1.3% year over year.
"Tech in general is suffering from weak capital spending as a result of uncertainty about the broader economy and the fiscal cliff," said Charlie Smith. He manages Fort Pitt Capital Total Return Fund and co-founded Pittsburgh-based Fort Pitt Capital Group with $1.3 billion in assets under management.
Third-quarter earnings for basic materials producers fell 26% year over year -- the most among all S&P sectors. Energy profits fell nearly 18%. Consumer discretionary and financials saw the most earnings growth of 7% and 6.4%, respectively.
China Trumps World Markets
China region funds surpassed all foreign markets, returning 3.00% in October and 10.14% year to date. Emerging market funds shed 0.15% while climbing 10.90% year to date. The People's Bank of China decreased reserve requirements to increase the money supply. It cut the key interest rate twice this year to stimulate the economy and encourage investment.
"For the week ending Oct. 19, we observed the sixth-largest weekly inflow on record into China," said Rob Lutts, president at Cabot Money Management in Salem, Mass., with $500 million in assets under management. "This is very encouraging and is a sign that large investors are now once again interested in China."
Although the world's second-largest economy grew 7.4% in the third quarter -- the slowest rate since early 2009 -- it's projected to expand at a faster rate, 8%, in 2013. Expectations of a "hard landing" this year sent Chinese stocks to historically low valuations.
"The Shanghai SE Composite (Index) trades at eight times next years' earnings and Hang Seng Index in Hong Kong trades at about 10.5 times next years' earnings," Lutts said. "Given the financial strength, low government debt and individual debt levels, and overall growth of these regions, we do not believe that these prices will remain very long."
But investors need to consider China's high volatility.
"While past underperformance, a bottoming of economic data and new stimulus could result in a several-months-long rally in investments tied to China, we believe any rallies should be treated with caution," Charles Schwab's investment strategists wrote. "A difficult recovery and high expectations could present head winds, and a rally in China-related investments may be short-lived."
"Corruption is widespread in China and bribery seems to be almost the norm," said Andrew Schrage, co-owner of Money Crashers Personal Finance in Piscataway, N.J. "Counterfeiting and theft of intellectual property are also rampant. All of these factors make for an unstable investing environment."
European Funds Muddle Through Debt Crisis
European funds added 1.17% in October and a respectable 14.36% year to date despite negative economic reports. Unemployment in the 17-country eurozone hit a record high of 11.6% in September or 18.5 million people, putting the region in danger of another quarter of economic contraction as the debt crisis enters its fourth year with no solution in sight.
"Companies generally are under serious pressure to keep their labor forces as tight as possible to contain their costs in the face of current limited demand, strong competition, squeezed margins and worrying and uncertain growth outlooks," wrote Howard Archer, chief European and U.K. economist at IHS Global Insight.
Spain's jobless rate rose to 25.8% and Greece's to 25.1%. Greece faces more public sector job cuts if it undergoes more austerity measures demanded by creditors in exchange for more bailout loans. The country would go bankrupt without more aid, while spending cuts and tax hikes would spur public protests and job strikes. Whether Spain will request a full-blown bailout like Greece remains unclear.