A casual observer of financial markets might have expected worse after August. Much worse. If you’ve been keeping up with the media reports, red ink looked like a sure thing for September.
In fact, the exact opposite graced September as all the major asset classes ran higher last month. One might reasonably be surprised at the outcome. After all, the Federal Reserve cut interest rates by an aggressive 50 basis points two weeks back, a decision in anticipation that the subprime/housing fallout would take a hefty toll on the economy and, by extension, the capital markets. Trouble may yet be coming, but as you can see from our chart below, everything was in the black for September.
If you weren’t reading the day-by-day analysis and instead looked only at monthly total returns, you might think that all’s well and by more than a little.
All was particularly well last month in emerging market equities, which was firmly in first place for September’s biggest gain. Indeed, EEM surged nearly 12% last month. Emerging market stocks have rarely performed better on a calendar month basis in dollar terms.
Commodities had an impressive month as well. DJP added 8% in September, driven by higher prices for oil and gold, to name but two of the more obvious climbers. In third place: EFA, a proxy for developed market stocks.

Clearly, foreign stocks and commodities were the place to be in September. One reason: the dollar was in the dumps.
If the dollar and dollar-based assets are on the defensive globally, it comes as no great surprise to find that non-dollar assets and commodities are the prime beneficiaries. Owning securities denominated in anything other than the buck needed no explanation in September. Meanwhile, because commodities are typically priced in dollars, a falling greenback invariably means that more of the currency is needed to purchase the same quantity of oil, gold, etc. Inflation, in short, is the natural result of a depreciating currency and the rise in commodity prices proves the point.
The dollar’s slump last month was the primary force in the investing universe. As such, the dollar news was a significant diversion from the domestic economic ills that still loom over the U.S. Subprime and housing woes haven’t evaporated; they’ve simply been displaced by the dollar-generated bull markets in foreign equities and commodities.
That leaves the question: Will domestic issues return to the fore in driving returns among the major asset classes?
Perhaps. Meanwhile, one could reason that the good times in foreign equities and commodities have encouraged investors to stay bullish on U.S. stocks as well. Bullish thinking is nothing if not infectious. Indeed, U.S. stocks posted an impressive gain last month–one of the best so far this year. Even REITs appear to be knee-deep in comeback mode.
All of which brings us back to square one: everything’s in a bull market…again. Year to date, only REITs are in the red, although given the momentum of late that could turn to black once more. Pondering the possibility suggests that 2007 be another year when all the major asset classes post gains. If so, that will be five years running (calendar years) with everything blessed by the bull with the lone exception of foreign developed government bonds, which lost ground in 2005.
By our calculations, the gains have never run on for so long among so many with almost no interruption. Of course we’ve been saying that for some time now only to watch markets surge higher.