Commentaries

PMC Market Commentary: October 3, 2014

A Macro View – September Monthly Recap

Domestic equity markets were broadly lower in September after posting robust gains in August. Stock prices reacted negatively to a perception of slowing growth domestically, continued tepid growth in Europe, below-target growth in China, and the prospect of rising interest rates as the Federal reserve winds down its asset purchase program. However, domestic economic data remains on an uptrend, with the final estimate of second quarter real gross domestic product (GDP) coming in at +4.6%, up from the previous estimate of +4.2%. Employment gains also ramped up in September, with 248,000 jobs added, a significant rise from August’s gain of 142,000. In addition, the unemployment rate declined to 5.9%, the first time it has been below 6% since mid-2008.

Despite the seemingly benign backdrop, however, stocks generally declined during September. The S&P 500 lost -1.4% for the month, and is now up +8.3% on a year-to-date basis. The Dow Jones Industrials also declined, shedding -0.2%. The tech-heavy Nasdaq Composite Index gave up -1.8% as technology stocks finally encountered a bout of profit-taking. The Russell 2000 Index of small cap stocks lagged significantly, underperforming the Russell 1000 Index of large cap stocks, with returns of -5.4% and -1.8%, respectively. Growth stocks fared better than value stocks during the month. In terms of sector performance, consumer staples was the strongest performer on a relative basis, gaining +0.6%, while energy was the poorest performers, posting a decline of -7.6%.

International equity markets were also lower in September, reacting negatively to meager growth in the eurozone region and ongoing geopolitical and military tensions in Ukraine and the Middle East. The MSCI World ex-U.S. Index declined -4.1% for the month. Emerging markets performed poorly, in part due to concern that potentially rising interest rates would hamper growth. The MSCI Emerging Markets Index dropped -7.4% for the month, and the MSCI EAFE Index, which measures developed markets performance, was down -3.8%. Regionally, Japan was the best performer on a relative basis, with the MSCI Japan Index declining -0.6%. Latin America and the Pacific region ex-Japan were among the poorest performers, with results of -13.3% and -9.5%, respectively.

Fixed income markets fared no better than equities in September, as investors have become increasingly concerned about the potential for rising interest rates. The Fed continued to taper its asset purchases during the month, reducing purchases by an additional $10 billion, and announced that the program would end completely in October. With this as a backdrop, the benchmark 10-year U.S. Treasury yield ended the month at 2.51%, up 17 basis points from the 2.34% level of August 31st. Broad-based fixed-income indices were mainly lower in September, with the Barclays U.S. Aggregate Bond Index declining -0.7% for the month. Global fixed-income markets performed extremely poorly, with the Barclays Global Aggregate ex-U.S. Index returning -4.3% for the month. Intermediate-term corporate bonds also suffered, as the Barclays U.S. Corporate 5-10 Year Index fell by -1.4%. The Barclays U.S. Corporate High Yield Index posted a loss of -2.1% for the month. Municipals continued their solid relative performance, posting a gain of +0.1%.

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