Stocks Beat Bonds, Commodities With Longest Rally Since 2007

Oct. 1 (Bloomberg) -- Dominic Chu examines market expectations for the fourth quarter. He speaks on Bloomberg Television's "Bottom Line." (Source: Bloomberg)

Emerging markets led global stocks to the fourth monthly gain in September, the longest streak since 2007, handing equity investors better returns than bonds, commodities and the dollar and pushing them ahead for the year.

The MSCI All-Country World Index of equities increased 3.2 percent last month including dividends, bringing its 2012 gain to 13 percent. The Standard & Poor’s GSCI Total Return Index of 24 commodities slid 1.4 percent, trimming its yearly advance to 3.5 percent, while the U.S. Dollar Index (DXY) lost 1.6 percent. Bonds of all types returned 0.31 percent, on average, according to Bank of America Merrill Lynch’s Global Broad Market Index.

Unprecedented steps by central bankers to fix the slowest global growth since 2009 sent investors to equities. The U.S. Federal Reserve pledged on Sept. 13 a third round of asset purchases to revive the economy after unemployment stayed above 8 percent for 44 months. The European Central Bank announced an unlimited bond-buying program last month, the Bank of Japan unexpectedly expanded its asset-purchase fund and India’s central bank lowered the cash reserve ratio for lenders.

“The Fed is being very aggressive,” Neel Kashkari, who heads global equities at Newport Beach, California-based Pacific Investment Management Co., said by telephone. His firm manages about $1.82 trillion. The “double-dip recession in America and fragmentation of the euro zone have been taken off the table. All of a sudden, markets end up feeling much less nervous and stocks are able to rally.”

Bears Forecast

The advance in equities is running counter to the forecasts of bears such as Gary Shilling, president of A. Gary Shilling & Co. and a Bloomberg View columnist. In January, he predicted declines in equities amid falling earnings and a “moderate” recession.

Nouriel Roubini, who oversees consulting firm Roubini Global Economics and predicted the U.S. housing bubble, said growth in China will slow to 5 percent or less next year as the economy enters a “hard landing,” according to a Bloomberg Television interview on Sept. 7.

The global economy is forecast to expand 2.2 percent this year, the slowest pace since the 2009 contraction, according to the median estimate from economists surveyed by Bloomberg. Gross domestic product may increase 2.6 percent in 2013 and 3 percent in 2014, the forecasts show. That compares with average growth of 2.7 percent from the past 15 years.

‘Flat’ Economies

Stocks are still vulnerable to declines even after stimulus by central banks, Schilling said in a Sept. 27 phone interview.

“There’s a feeling that the underlying economies don’t matter,” Shilling said by phone. “Even with all the immense monetary and fiscal stimuli, the economies of the world are really flat at best.”

The S&P 500 rallied 2.6 percent to 1,440.67 last month, touching the highest level since 2007 and bringing its 2012 advance to 16 percent, as telephone companies, health-care providers and commodity producers climbed. The U.S. equity benchmark needs to increase 8.6 percent to reach its all-time high of 1,565.15.

The S&P 500 may drop 2 percent to end the year at 1,412, according to the average forecast of 14 Wall Street strategists surveyed by Bloomberg.

Eleven quarters of profit growth have sent the benchmark gauge for American equities up 130 percent from a 12-year low on March 9, 2009. Earnings are forecast to reach a record $103.44 a share in 2012 and climb 11 percent in 2013, according to analyst estimates compiled by Bloomberg. The Stoxx Europe 600 Index has advanced 96 percent over the period and the MSCI Asia Pacific Index has added 92 percent.

Today’s Trading

Futures on the S&P 500 rose 0.5 percent to 1,440,8 at 10:33 a.m. in London today. The Stoxx 600 (SXXP) advanced 1 percent and the MSCI Asia Pacific fell 0.4 percent.

The Shanghai Composite Index added 2.2 percent last month, snapping a four-month streak of losses. Brazil’s Bovespa rallied 3.7 percent in September, bringing its gain this year to 4.3 percent.

Apple Inc. (AAPL), the world’s largest company by market value, surged 15 percent including dividends and reached a record $702.10 in the third quarter as it introduced the iPhone 5, bringing its 2012 return to 65 percent. Emerging-market companies made up nine of the 10 biggest gains in the MSCI global equity benchmark in September.

Indian Companies

Indian companies led the MSCI Asia Pacific Index to a 5.7 percent advance last month. The Reserve Bank of India cut the cash reserve ratio on Sept. 17 to 4.5 percent from 4.75 percent, adding about 170 billion rupees ($3 billion) to the banking system.

Commodities rose in the three months ended September by the most since the first quarter of 2011 as the worst U.S. drought in 56 years drove gains in farm goods and anticipation of new government stimulus measures boosted metals and energy.

The S&P GSCI Spot Index of raw materials rose 11 percent during the third quarter, rebounding from a 13 percent drop in the previous three months. Twenty of the 24 commodities in the GSCI advanced, led by silver, wheat, gasoline and lead. Hogs, sugar, feeder cattle and cotton fell during the quarter.

Additional stimulus from central banks and a decline in the value of the dollar helped push precious-metals prices higher. Gold increased 5.1 percent in September and is up 11 percent since June 30, the biggest quarterly increase in two years. Silver’s 10 percent September rally pushed the quarterly advance to 25 percent, the most since the end of 2010.

Corn surged to a record of $8.49 a bushel on Aug. 10, and soybeans reached an all-time high on Sept. 4 as the U.S. cut its harvest estimates amid the drought.

Bond Buying

Bets on rising raw-materials prices jumped to a 16-month high in mid-September, just before the Fed pledged the third round of bond buying, U.S. Commodity Futures Trading Commission data show. Goldman Sachs Group Inc. on Sept. 21 forecast an 18.2 percent return from commodities in the next 12 months, with energy and industrial metals leading the way.

At the same time, signs of a deepening slowdown in China, along with the debt crisis in Europe, weighed on raw materials in the last two weeks of the quarter, coming close to erasing gains for the year. The S&P GSCI index fell 4.1 percent since Sept. 14.

Prices in most cases “appear to be topping out now for the rest of the year and quite possibly through 2013,” Edward L. Morse, Citigroup Inc.’s global head of commodities research in New York, said in a Sept. 24 report.

Dollar Weakens

The dollar fell for a second month on concern that more stimulus from the Fed will debase the currency. Intercontinental Exchange Inc.’s Dollar Index, tracking the greenback against six major U.S. trading partners, fell 2.1 percent in the third quarter. The index has fallen 0.3 percent in 2012.

The gauge will be about unchanged at 79.3 in the first quarter of next year, according to the median of 11 analyst estimates compiled by Bloomberg.

Bank of America Merrill Lynch’s Global Broad Market Index rallied for a third month, and by the most since July. The gauge, tracking some 19,800 fixed-income securities with a market value of about $45 trillion, climbed 1.96 percent in the past three months, the best quarterly performance in a year. Average yields fell to 1.59 percent on Sept. 26, the lowest on record since at least 1996, from 2.24 percent at the end of 2011.

Fed ‘Challenge’

“People are in the mode of, let’s not fight the Fed,” Jason Brady, a managing director at Santa Fe, New Mexico based Thornburg Investment Management Inc., which oversees about $83 billion, said Sept. 26 in a telephone interview. “In bond land, that means the Fed is buying huge amounts of the market. That’s a challenge for a lot of managers, as there’s not a lot of product out there.”

Brady said he favors corporate debt.

Investment-grade corporate debt rose 0.71 percent, a sixth consecutive monthly gain in the longest advance since 2009, Bank of America Merrill Lynch index data show. An index of high-yield bonds returned 5.85 percent in the quarter, the most since the first three-month period of 2012. Speculative-grade debt is rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.

Mortgage bonds guaranteed by government-backed agencies including Fannie Mae and Freddie Mac returned 0.24 percent, the 21st consecutive monthly gain for Bank of America Merrill Lynch’s Mortgage Master Index. The gauge returned 1.13 percent from July through the end of August. Treasuries rose 0.57 percent in the quarter.

U.S. Yields

Yields on 10-year U.S. government debt are forecast to climb to 1.75 percent by the end of the year from 1.63 percent at the end of last month, according to the median estimate of 78 economists surveyed by Bloomberg.

Greek bonds were the best performers in September among the 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies, rising 18.4 percent. Ireland was second, with a 7.9 percent gain. Spain’s returned 7.3 percent and Italy’s 6.4 percent.

To contact the reporters on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net; Joe Richter in New York at jrichter1@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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