Stocks Cap Biggest Rally in Two Years to Beat Bonds, Commodities

Global equities completed the biggest back-to-back monthly gain in almost two years, beating all other assets in October, as U.S. lawmakers avoided a debt default and investors speculated the Federal Reserve will maintain stimulus.

The MSCI All-Country World Index of stocks in 45 markets climbed 4.1 percent including dividends in October, bringing the two-month advance to 9.5 percent. The Standard & Poor's 500 Index rose 4.6 percent, the most since July. Bonds of all types returned 0.9 percent on average, the most since April, according to Bank of America Merrill Lynch's Global Broad Market Index. The Bloomberg Dollar Index fell less than 0.1 percent after touching its lowest level since February, while the S&P GSCI Total Return Index of 24 commodities lost 1.4 percent.

Congress's budget agreement helped shares rally and price swings to narrow in what has historically been the most volatile month for equities. Treasury yields slipped to a three-month low as the borrowing impasse caused a 16-day government shutdown, stoking speculation that the Fed will delay cutting its stimulus program until next year.

"We're in a sweet spot where the economy is strong enough to help push profits higher, but not strong enough to prompt Federal Reserve tightening," Alan Gayle, senior investment strategist and director of asset allocation at RidgeWorth Capital Management, said by phone from Atlanta. His firm oversees about $48 billion. "The lower level of global economic activity is putting a lid on commodity prices."

Europe Rebound

About $2.3 trillion was added to global share values in October as corporate earnings beat analysts' estimates and optimism grew that Europe is recovering from a recession. Shares in Greece and Italy were among the world's biggest gainers as European money managers received fresh cash from clients for a 15th consecutive week.

Expectations for volatility in financial markets fell for the month as investors shrugged off the U.S. congressional standoff. Bank of America Corp.'s Market Risk Index that uses options to forecast fluctuations in equities, currencies and bonds slumped 52 percent in October and reached a nine-month low on Oct. 22. The Chicago Board Options Exchange Volatility Index, the gauge of S&P 500 options prices known as the VIX, tumbled 17 percent last month, the most since July.

While the government shutdown will probably slow fourth-quarter gross domestic product by 0.3 percentage point, Fed policy makers will wait until March before scaling back the $85 billion of monthly bond purchases, according to a Bloomberg Oct. 17-18 survey of economists.

'Incredible Uncertainty'

"Even though you had this incredible uncertainty with Congress, at the end of day you had the Fed holding up the market like Atlas holding the world on his shoulders," Kristina Hooper, a U.S. investment strategist at Allianz Global Investors in New York, said in a phone interview. The firm oversees $409 billion. "That provides a level of comfort for investors."

Fed policy makers said Oct. 30 they would press on with the pace of monetary stimulus even as signs of "underlying strength" emerge, fueling speculation the central bank may taper asset buying in coming months.

The S&P 500 (SPX) extended its advance for the year to 23.2 percent, challenging 2009 for its best yearly gain in a decade. About 75 percent of the companies in the S&P 500 that reported earnings during the month exceeded analysts' profit forecasts, data compiled by Bloomberg show.

Equity Valuations

The rally has driven equity valuations to an almost four-year high, with the S&P 500 trading at 15.9 times estimated operating earnings. The benchmark index may end the year at 1,718, a 2.2 percent retreat from the closing level yesterday, according to the average of 19 estimates from strategists in a Bloomberg survey.

The MSCI Emerging Markets Index advanced 4.8 percent, completing its first back-to-back monthly gain since January. International investors added to equity holdings in 10 of the 12 developing nations tracked by Bloomberg in October as predictions for sustained Fed stimulus through March spurred demand for riskier assets.

Chinese shares performed worst among the world's 45 biggest markets as the Shanghai Composite Index dropped 1.5 percent, amid a surge in the nation's money-market rates. The seven-day repurchase rate, a gauge of funding availability in the banking system, jumped 20 percent for the month as policy makers are limiting the cash supply to help keep inflation in check.

'Every Reason'

Bank of America Merrill Lynch's Global Broad Market Index, tracking debt securities with a market value of about $46 trillion, has declined 0.5 percent in 2013, as of Oct. 30. Average yields fell 12 basis points, or 0.12 percentage points, last month to 1.9 percent.

The Bloomberg U.S. Dollar Index, which tracks the currency against 10 major peers, fell 0.01 percent. The gauge rallied yesterday, paring a deeper monthly decline, after the euro-area inflation rate unexpectedly cooled, fueling speculation the European Central Bank will cut interest rates to spur the economy.

"The resolution to the shutdown and the debt ceiling standoff brought both interest rates and the U.S. dollar lower," Jake Lowery, a portfolio manager focusing on global rates at ING U.S. Investment Management, which oversees about $180 billion from Atlanta, said Oct. 29 in a telephone interview. "October gave the Fed every reason to hold asset purchases steady at their upcoming meeting and perhaps longer."

Treasury Yields

U.S. Treasuries rose 0.6 percent as of Oct. 30, the second-straight monthly gain. Yields on 10-year U.S. government debt may climb to 2.8 percent by the end of the year, from 2.6 percent, according to the median estimate of 65 economists surveyed by Bloomberg News.

High-yield (BHYC) bonds rallied 2.4 percent last month as of Oct. 28 after gaining 1.8 percent in September, according to the Bloomberg Global High Yield Corporate Bond Index. Speculative-grade debt is rated below Baa3 by Moody's Investors Service and BBB- by S&P.

Greece's bonds were the best performers in October among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 7.3 percent. Portugal's were second with a 3.4 percent gain. Australia's debt lost the most with a 0.1 percent decline.

Euro, Yen

The 17-nation euro gained 0.4 percent versus the greenback and Japan's yen fell 0.1 percent. Europe's currency is forecast to weaken to $1.33 against the dollar by the end of the year, from $1.3584, according to the median estimate of economists surveyed by Bloomberg. Japan's is estimated to weaken to 100 from 98.36.

Malaysia's ringgit rallied 3.3 percent against the greenback, the biggest gain of its 31 most-traded peers as the nation's equity index touched a record high. The government forecast growth of as much as 5.5 percent next year as Prime Minister Najib Razak pledged to support the economy while taking steps to meet the government's budget-deficit reduction goals.

Commodities fell for a second month in October amid sluggish global growth and signs of supply surpluses for everything from coffee to zinc. The S&P GSCI Total Return Index of 24 raw materials has fallen 2.3 percent this year, heading for the biggest annual loss since 2008.

Economic reports during the month showed that American employers added fewer jobs than expected in September while preliminary data indicated manufacturing from the U.S. to Europe expanded at a slower pace than forecast in October.

Oil, Copper

Crude oil slumped 5.8 percent. Total U.S. petroleum demand is at the lowest seasonal level in 15 years, according to data from the EIA, the Energy Department's statistics unit.

Copper fell last month for the first time since June. Inventories monitored by the London Metal Exchange have risen 49 percent this year.

"We're seeing a lot of supply come in various commodities, notably oil and copper," Walter "Bucky" Hellwig, who helps manage $17 billion of assets at BB&T Wealth Management in Birmingham, Alabama, said in an interview. "Scarcity and demand, the things that had driven commodities the past few years, have backed off a bit."

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Cotton prices fell 12 percent, reaching a nine-month low, as farmers are poised to collect a record harvest in India, the world's second-largest producer. Coffee futures capped the longest slump since 1972 as wet weather signaled rising production in Brazil, the top grower.

Gold Declines

Gold slid 0.2 percent in October, as speculation that the Fed will trim U.S. monetary stimulus sooner than anticipated erased gains for the month on the final day. Bullion is headed for the first annual loss since 2000 as some investors lost faith in the metal as a store of value.

Natural gas for next-month delivery gained 0.6 percent to $3.581 per million British thermal units. Prices rose to a five-month high during a cold snap in mid-October and have dropped 7.4 percent since then amid moderating weather and bigger-than-forecast increases in stockpiles of the heating fuel.

"The market should continue to trade with a bearish undertone until there is a clear sign that winter-like weather is finally starting to set in," Dominick Chirichella, senior partner at the Energy Management Institute in New York, said in a note to clients dated Oct. 29. "Demand has yet to have a major impact."