Stocks fall for third month in October on rates outlook, Middle East conflict

Stocks fell for a third consecutive month in October on concerns that interest rates will remain high for longer than expected, and amid an escalating conflict in the Middle East.

The STOXX^® Global 1800 index fell 2.8% last month when measured in dollars and including dividends,^[1] reducing its 2023 gain to 7.9%. The index finished the month 9.2% below its 2023 peak in July. The benchmark slid 17.9% in 2022, its worst year since 2008, as central banks pressed ahead with higher rates to fight runaway inflation. The index fell 2.6% in euros in October. 

The STOXX^® World AC index fell 3% in dollars in October.

The Eurozone’s EURO STOXX 50^® dropped 2.6% in euros in the month on a total-return basis, while the pan-European STOXX^® Europe 600 declined 3.6%.^[2] The STOXX^® North America 600 dropped 2.3% in dollars, while the STOXX^® USA 500 fell 2.1%. The STOXX^® Asia/Pacific 600 lost 4.5% in dollars. The STOXX^® Developed World shed 2.9% and the STOXX^® Emerging Markets slid 4%.

Figure 1: STOXX Benchmark indices’ October risk and return

_{Source: STOXX. Gross returns. Data as of Oct. 31, 2023.}

Figure 2: STOXX Equity World indices’ October risk and return

_{Source: STOXX. Gross returns. Data as of Oct. 31, 2023.}

Germany’s DAX^® fell 3.7% in the month. MDAX^®, which gauges the performance of German mid-caps, retreated 7.8%. 

The STOXX Global 1800 fell 1.1% on Oct. 26 after US gross domestic product was reported to have grown at an annual 4.9% in the third quarter, beating economists’ estimates and bolstering expectations that the Federal Reserve may keep rates high. The European Central Bank held its key rate steady in October but President Christine Lagarde said more hikes are possible.^[3]

Meanwhile, Israel launched a military offensive on the Gaza Strip following an attack from Palestinian group Hamas on Oct. 7. 

Figure 3: Total annual % returns for STOXX World AC index

_{Source: STOXX. Gross returns.}

Figure 4: Select STOXX benchmarks’ returns since Jan. 1, 2020

_{Source: STOXX. Gross returns in dollars except for STOXX Europe 600 Index, which is in euros. Data from Dec. 31, 2019, to Oct. 31, 2023.}

Volatility 

The EURO STOXX 50^® Volatility (VSTOXX^®), which tracks EURO STOXX 50 options prices, rose to 19.7 at the end of last month from 17.5 in September. The gauge reached 23.3 on Oct. 20, the highest level since March this year. A higher VSTOXX reading suggests investors are paying up for puts that offer insurance against stock price drops. The VDAX-New^®, which measures volatility in German equities, climbed to 18.9 from 16.6 in September. 

Automobiles shares pace retreat

All but four of 20 Supersectors in the STOXX Global 1800 had a negative return in the month. The STOXX^® Global 1800 Automobiles & Parts index led losses after falling 14%. 

All but two of 25 developed markets tracked by STOXX fell in the month when measured in dollars. The STOXX^® Israel Total Market index was the worst performer after shedding 16.7%. At the other end, the STOXX^® Poland Total Market index jumped 13.5% following national elections in the country. Fifteen of 20 national developing markets tracked by STOXX declined. 

Factor investing

On a global basis, Size showed the worst performance for a second straight month while Low Risk was the best-performing style, according to the STOXX Factor indices. The STOXX^® Global 1800 Ax Size fell 5.4%. 

Figure 5: STOXX Factor (Global) indices’ October risk and return characteristics

_{Source: STOXX. Gross returns. Data as of Oct. 31, 2023.}

Climate benchmarks

Among climate benchmarks, the STOXX^® Global 1800 Paris-Aligned Benchmark (PAB) (-2.8%)^[4] and the STOXX^® Global 1800 Climate Transition Benchmark (CTB) (-2.7%) performed broadly in line with their benchmark in the month. The PAB and CTB indices follow the requirements outlined by the European Commission’s climate benchmarks regulation.

Among the STOXX Low Carbon indices, the EURO STOXX 50^® Low Carbon (-3.3%) underperformed the EURO STOXX 50 by 65 basis points in October. Elsewhere, the STOXX^® Global Climate Change Leaders (-2.9%), which selects corporate leaders that are publicly committed to reducing their carbon footprint, underperformed the STOXX Global 1800 by 11 basis points.

Sustainability indices

The STOXX^® Global 1800 ESG-X index slid 2.9% in the month. The STOXX^® ESG-X indices are versions of traditional, market-capitalization-weighted benchmarks that observe standard responsible exclusions. 

Within indices that combine exclusions and ESG best-in-class integration, the EURO STOXX 50^® ESG index fell 2.5%. Germany’s DAX^® 50 ESG index (-4.9%), which excludes companies involved in controversial activities and integrates ESG scoring into stock selection, trailed the benchmark DAX.

Among other STOXX sustainability families, the STOXX^® Global 1800 ESG Broad Market fell 2.9% in the month. The STOXX ESG Broad Market indices apply a set of compliance, product involvement and ESG performance exclusionary screens on a starting benchmark universe until only the 80% top ESG-rated constituents remain. 

The STOXX^® Global 1800 ESG Target lost 3.2%, the EURO STOXX^® ESG Target fell 3.6% and the DAX^®ESG Target dropped 4.2%. The STOXX and DAX ESG Target indices seek to significantly improve the benchmark portfolio’s ESG profile while mirroring its returns as closely as possible. Through a series of constraints, the indices implement an optimization process to maximize the overall ESG score of the portfolio while limiting the tracking error to the benchmark. 

The STOXX^® Global 1800 SRI retreated 4.2%. The STOXX SRI indices apply a rigorous set of carbon emission intensity, compliance and involvement screens, and track the best ESG performers in each industry group within a selection of STOXX benchmarks. 

Finally, the DAX^® ESG Screened fell 4.5% in the month. The index reflects the composition of the DAX benchmark minus companies that fail to pass norms-based and controversial weapons screenings, meet minimum ESG ratings or are involved in certain business activities considered undesirable from a responsible investing perspective. 

Thematics, dividend strategies

Among 34 STOXX^® Thematic indices, only nine outperformed the benchmark STOXX Global 1800 last month. 

Most dividend strategies underperformed last month. The STOXX^® Global Maximum Dividend 40 (-3.3%) selects only the highest-dividend-yielding stocks. The STOXX^® Global Select Dividend 100 (-3.9%) tracks companies with sizeable dividends but also applies a quality filter such as a history of stable payments.

Minimum variance

Minimum variance strategies had good relative performances last month. The STOXX^® Global 1800 Minimum Variance fell 0.9% and the STOXX^® Global 1800 Minimum Variance Unconstrained lost 1%. 

The STOXX Minimum Variance Indices come in two versions. A constrained version has similar exposure to its market-capitalization-weighted benchmark but with lower risk. The unconstrained version, on the other hand, has more freedom to fulfill its minimum variance mandate within the same universe of stocks.

^[1] All results are total returns before taxes unless specified.

^[2] Throughout the article, all European indices are quoted in euros, while global, North America, US, Japan and Asia/Pacific indices are in dollars. 

^[3] FT, “ECB holds key interest rate at 4%,” Oct. 26, 2023. 

^[4] Figures in parentheses show last month’s gross returns.