Calvert News & Commentary

October Market Commentary: Recovery Continues Slowly as Predicted Even as New Challenges Arise


By Natalie Trunow, Chief Investment Officer, Equities, Calvert Asset Management Company, Inc.

Natalie Trunow, Head of Equities Natalie Trunow,
CIO, Equities

The global equity markets continued to stay in positive territory during the month of October with the Russell 1000, S&P 500, Russell 2000, MSCI EAFE and MSCI Emerging Market Indices returning 3.9%, 3.8%, 4.1%, 3.6%, and 2.9%, respectively. The top performing sectors for the month were Materials, Information Technology, Energy and Consumer Discretionary, while Telecommunications, Utilities and Financials lagged. Growth stocks outperformed value names with the Russell 1000 Growth Index returning 4.78% while the Russell 1000 Value Index gained 3.00% for the month. For the calendar year through October, the two indices returned 9.35% and 7.63%, respectively.

Foreclosure Debacle has Broad Impact

A double-dip in the housing market is likely to be protracted by the pause in foreclosure filings caused by lenders’ reviews of documentation practices. This will probably continue to depress consumer confidence and spending even if the unemployment rate subsides. The flawed foreclosure documentation debacle also negatively impacted the Financials sector for much of the month. J.P. Morgan Chase, Wells Fargo, Bank of America and other banks are likely to suffer from the cost of litigation and delays in the foreclosure process. Such delays are also likely to stall the clearing of housing inventories, further dampening the already weak housing market and negatively impacting the balance sheets of U.S. banks. Banks’ earnings will also take a hit if legal actions lead to mortgage principal reductions and if investors in mortgage-backed securities are able to put these bonds back to the banks. JPMorgan announced that they are creating a $2.3 billion reserve for potential litigation and other expenses.

Investors are speculating that banks may be forced to buy back billions of dollars in mortgage loans from investors who may challenge banks’ documentation. Some estimates go as high as $170 billion in losses that may be incurred due to potential mortgage securities repurchases while others seem to think that the losses will be in the $100 billion range. The resolution process, however, may be drawn out which will allow the banks to regain their footing in order to address the issue.

Recovery Continues Slowly as Predicted

Economic data continues to show a protracted and slow economic recovery. The U.S. GDP growth numbers for the third quarter came in at a 2% annualized level, as expected, reflecting the dampening effects of high unemployment and low consumer confidence on overall economic growth.

For October, the picture in manufacturing continued to look optimistic with Institute for Supply Management figures showing expansion. Having said that, capacity utilization fell to 74.7 percent in September down 0.1 percent. It seems that the inventory rebuilding cycle is now mostly complete and manufacturing growth will be less of a robust source of economic recovery than it has been in the past several quarters.

While the Consumer Sentiment Index fell in October, consumer spending has picked up, increasing by an impressive 2.6% last quarter, as consumers fill some of their pent-up demand for goods. If this is the beginning of the trend we forecasted earlier in the year, we might be seeing the beginning of the much-needed consumer recovery, which is necessary for more robust economic growth. If this scenario unfolds and corporate earnings continue to be healthy, we may get an upside surprise in the economic recovery and the equity markets in the next several months.

Markets Anticipate Federal Intervention

Throughout the month, the equity markets held on to their gains in anticipation of another round of quantitative easing (QE2) by the U.S. Federal Reserve (the Fed), which is considered to be a stimulus and generally positive for the equity markets. We believe there is a possibility for a considerable short-term downside surprise if the Fed does not pursue QE2 in the scope or the course of implementation expected by the markets today.

China and Emerging Economies

U.S. interest rates and the dollar remain weak, helping boost exports and earnings of U.S. multi-national corporations. China continues to be in focus, with multiple governments pushing for the country to allow its currency, the Yuan, to fluctuate more freely, and criticizing the country’s human rights policies and environmental stance. At the end of the month, China raised its interest rates by 0.25 percent, fueling a concern that the country’s economic growth may slow, which may negatively impact the global economic recovery.

Despite potential marginally slower growth, emerging economies with less depressed currencies are increasing demand for commodities, which is resulting in across-the-board price increases in the commodities markets.


The S&P 500 is now up for two consecutive months; rising 3.8% in October after an 8.8% gain in September in reaction to a positive earnings season which showed 80% of S&P 500 companies beating Wall Street analysts’ earnings expectations. However, after a good 15% plus run since July—and a possible disappointment with quantitative easing as well as possible softness in next quarter’s corporate earnings comparisons—we may see a pull back in the equity markets in the very short run. In the medium-to-long term, we are still optimistic about the equity markets as the economic recovery gradually picks up steam.

This commentary represents the opinions of its author as of 11/2/10 and may change based on market and other conditions. The author’s opinions are not intended to forecast future events, guarantee future results, or serve as investment advice.

The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Asset Management Company, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.

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