Stock Funds Dropped by 4% in October

Do you remember the days when the stock market seemed unstoppable? It's not too long ago, but things have taken a different turn.

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Stocks experienced a decline for the third consecutive month in October, denting the gains achieved by stock-fund investors so far this year. The primary reason for this shift in fortunes has been the impact of the Federal Reserve's series of interest-rate hikes, intended to combat rising inflation. However, last week, the Fed suggested that it might pause its rate hikes for the time being, sparking a rally in the stock market as November began.

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Until July, stock funds had been on an impressive run, boasting a year-to-date gain of 16.7%. This was seen as a momentum-driven surge, and many analysts had cautioned that the latter part of the year could be more turbulent. Their predictions have proved accurate.

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In October, the average U.S. stock fund witnessed a 4% drop, according to data from Refinitiv Lipper, reducing the year-to-date gain to 3.8%. International-stock funds weren't immune either, as they registered a 3.5% decline in October, resulting in their year-to-date progress being trimmed to 2%.

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Lauren Goodwin, an economist and portfolio strategist at New York Life Investments, highlights that the resumption of student-loan payments, the increase in consumer delinquencies, and persistently high prices across the economy have made the U.S. consumer more vulnerable. This vulnerability has not gone unnoticed by the equity markets, which are responding to these concerns.

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Consequently, rate-sensitive sectors such as banking, industrial, and consumer durables have underperformed in recent months. On the flip side, defensive sectors and energy have begun to outshine the rest.

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The past month was particularly challenging for many "growth" stocks, those primarily fueled by their corporate earnings potential. Lipper's small-cap growth category, in particular, faced a significant setback, suffering a 7.3% decline in October, pushing its year-to-date performance into the negative at -2.8%.

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Large-cap growth funds also experienced a 1.7% drop in the month, but they remain up by an impressive 20.9% so far in 2023. This remarkable performance is largely attributed to the earlier-year rally in prominent tech companies. As a result, large-cap growth funds continue to rank among the best-performing fund categories this year.

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In addition to the stock market, bond funds also witnessed a decline in the quarter. Funds focused on investment-grade debt, the most common type of fixed-income fund, saw an average drop of 1.6%, increasing their year-to-date loss to 2.4%.

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