In the Market: Capital Markets Rebound in Third Quarter

Capital markets returns generally improved in the third quarter despite mixed macroeconomic signals. Investors seemed to focus on the favorable implications of the Federal Reserve’s decision to hold interest rates steady and on falling commodity prices rather than the caution signals coming from slowing Gross Domestic Product growth, the cooling housing market and the inverted yield curve. Returns to equity investors, both international and domestic, depended heavily on the capitalization size as well as the value/growth bias of the investment. Fixed income investments finished the quarter higher with longer maturity investments posting stronger returns than shorter term.

Stocks Gain Ground in Third Quarter

In a reversal from the second quarter, equity markets generally rose as the short-term inflation outlook improved and energy prices declined. Yet, in a continuation from the second quarter, investments with less perceived risk continued to outperform the general market. The Russell 1000 Value Index, a measure of large capitalization, dividend paying issues, rose 6.22% during the quarter while its growth-oriented counterpart, the Russell 1000 Growth Index, posted a more modest 3.94% increase. Small- and mid-cap securities also rose, but to a lesser degree than large-cap securities; the Russell MidCap Index gained 2.11%; and the Russell 2000 Index, a measure of small-capitalization companies, rose +0.44%.

International equity returns followed patterns similar to the U.S. markets: large cap outperformed small and mid cap; value outperformed growth. For the quarter, the bellwether Morgan Stanley Capital International (MSCI) Europe Australasia Far East (EAFE) Index returned +3.99% in dollar terms, lower than the return experienced in local currency of +5.08%, due to the strengthening of the dollar during the quarter.

Bonds Rise As Rate Hikes Persist

The bond market, buoyed by the Federal Reserve’s pause in interest rate hikes, posted positive results across the spectrum of quality and maturity. Falling energy prices also provided investors with some comfort that, at least in the short-term, the Fed may not have to increase rates to help keep inflation in check. Longer term maturities posted the strongest gains with the Lehman Long Government/Credit Index providing a +6.83% return to investors. The Lehman Intermediate Government/Credit Index returned +3.19% and the Lehman 1 to 3-Year Government/Credit gained 2.06%.

Long Term Focus Can Counteract Short-term Volatility

The ups and downs of the capital markets over short time periods can prove to be disconcerting to investors. Yet, volatility is to be expected; periods of gain may be followed by periods of loss. Those with a long time horizon, such as many retirement plan investors, are well served to realize that the markets do not move in a straight line. Historically, a well conceived investment plan that is maintained even in periods of loss, has generally provided a higher rate of return than one that attempts to time the markets movements, chasing returns from one outperforming part of the market to the next. ICMA-RC

This illustration was compiled from information obtained from various sources not affi liated with ICMA-RC: The Lehman Brothers Aggregate Bond Index represents securities that are US domestic, taxable, and dollar denominated. The index covers the US investment grade fi xed rate bond market, with index components for government and corporate securities, mortgage pass- through securities, and asset-backed securities. The S&P 500 Index is a market weighted index showing the changes in the aggregate market value of 500 stocks relative to the base period of 1941-43. The MSCI EAFE (Morgan Stanley Capital International Europe Australasia Far East) Index is composed of stocks screened for liquidity, cross-ownership, and industry representation and acts as a benchmark for managers of international stock portfolios.

You cannot directly invest in any of these indices, their performance does not represent the fees and expenses normally associated with the management of an open ended mutual fund. This information is for educational purposes only and is not to be construed or relied upon as investment advice. ICMA-RC shall not have any liability for any loss sustained by anyone who has relied on the information contained in this illustration. Past performance is not an indicator of future performance. Vantagepoint securities are distributed by ICMA-RC Services, LLC, a broker-dealer affi liate of ICMA-RC, member NASD/SIPC. ICMA Retirement Corporation, 777 North Capitol Street NE, Washington, DC 20002-4240. 1-800-669-7400. www.icmarc.org.