The month of October brought a mixed bag for equity markets. While market players remain optimistic towards future gains, perhaps in six months to one year, there were many days throughout the month that curtailed this positive sentiment. Economic indicators and a general paranoia hit the markets with regards to current and future terrorist threats. The negative feelings from the September 11 attacks remain in the mood of the population, and the threat of anthrax infections has everyone running scared, including market players. Despite these fears, market players were determined to move up from the low levels reached in September, and kept most of the major indices moving higher. The Dow reached past the 9,000-point level, and then fell back towards that level in the last days of the month. The NASDAQ actually had fairly good news throughout the month as the technology sector rebounded from the past few months' weakness and closed the month of October with nice gains.

Some sectors that had been performing well in the past few months and had fallen off as a result of the attacks started to regain some momentum, as technology and telecommunications rebounded. This led to the NASDAQ Composite index gaining substantially for the month. Energy stocks continued recent increases as oil prices continue to fall, finally showing some life after a year of poor performance. Health care stocks and the financial sector again dominated the positive performers, while entertainment, leisure and transportation stocks dropped like stones in the wake of the attacks. Transportation stocks in the airline industries again dominated the negative movers. Continuing their recent downturn, retailers and consumer goods fell off for the month as consumers remained home.

There were a few major moves in the month worth noting, particularly the first week of October, which saw market players move indices forward as a burst of optimism with regards to future gains hit the market. This first week moved the Dow back above the 9,000-point level. The following week saw large gains on the 10^th and 11^th as investors received some positive corporate profit news. As the days progressed, markets began to fall off, particularly from October 17^th on, when a substantially lower report on the housing market sent jitters throughout equities. The week of the 22^nd through 26^th were the last positive days for equities in October, as market players again hoped that equities had bottomed out, but the final days of October brought more negative economic news and reversed much of the previous gains.

October Treasury Market Overview
Bad News is Good News

Treasury prices continued gaining steam throughout the month of October as a host of weaker economic reports had Treasury market players hopeful of continued Fed rate cuts. From a weaker employment report released at the beginning of the month, to the October 17th drop in housing starts, and finishing the month of October with a drop in third quarter real GDP generated rate-cut optimism among bond investors. As with last month's attacks, the continued terrorist threats and anthrax scares in October have market players flying to the quality of these risk-free securities. While the economy is showing some mixed signs about possible recovery in the next six months, the current situation nevertheless deteriorated in October. Treasury market investors should continue to reap the benefits of risk-averse market players and the continued volatile global situation.

Bond markets got an especially positive day on the last day of the month, when the U.S. Treasury announced its quarterly refunding needs along with the (indefinite) suspension of the 30-year bond. This announcement caused yields to dramatically drop across the yield curve even though the elimination of the 30-year bond was discussed in the past couple of years as a very real possibility. The timing was a bit of a surprise, though, since the anemic economy coupled with a heavy dose of upcoming fiscal stimulus is likely to result in budget deficits for the next couple of fiscal years.

As the chart shows, yields moved down across the board, as the trend in the fixed-income market remains positive. A weak economy translates into rising bond prices, and falling yields, because it is accompanied by sluggish borrowing demands. The elimination of the 30-year bond ensures that the 10-year note now becomes the benchmark security at the longer end of the maturity spectrum. As a result, the yields on both fell dramatically on October 31 after the announcement. At the longer end of the curve, the 30-year bond decreased 54 basis points in October and finished at its lowest yield since 1993. The 10-year note dropped 47 basis points for the month. At the shorter end of the curve, the 5-year note lost 31 basis points; the 2-year note fell 45 basis points and the 3-month bill declined by 34 basis points in October. Yields are now at levels not seen since the recession of the early 1990s.

Damir Fonovich, Economist, Econoday