After the Storms

Despite a late-month rally fueled by better-than-expected third-quarter GDP data, U.S. domestic stocks slipped in October. The strong economic numbers may have alleviated fears of the after effects of Hurricanes Katrina and Rita, but they could not lift domestic equities out of negative territory.

Among domestic stock mutual funds, all style categories edged down during the month, with larger-cap portfolios incurring somewhat narrower losses than mid- and small-cap ones. The average domestic stock fund shed 2.21% in October, somewhat worse than a 1.77% drop for the S&P 500, and a decline of 1.46% for the Nasdaq Composite.

“The equity markets have been hurt by worries over the impact of rising oil prices, inflation, and interest rates on corporate earnings,” said Rosanne Pane, mutual fund strategist at Standard & Poor’s. “Large-cap funds tend to do better in declining markets as investors avoid the smaller, more aggressive options.”

Year-to-date, however, the average domestic equity fund has risen 1.99%, while the S&P 500 edged up 0.94%, and the Nasdaq has dropped 2.53%.

U.S. investors face a number of concerns. Although energy prices have recently retreated, they still remain high — a barrel of crude settled at just under $60 at month-end — and could put a damper on longer-term economic health. Moreover, the nomination of White House economist Benjamin Bernanke as successor to Fed Chairman Alan Greenspan virtually guarantees that interest rates will continue to rise as the Fed seeks to clamp down on inflation.

The central bank has steadily enacted a series of 25 basis point interest rate hikes since June 2004, placing the Fed Funds rate now at 4.00%. The Fed will also meet on December 13 and January 31. Sam Stovall, Standard & Poor’s chief investment strategist, said “there is a possibility that the Fed will raise rates by 50 basis points at the December 2005 meeting, instead of the more measured pace of 25 basis points seen in the prior 12 meetings.”