Commentaries

PMC Weekly Review - November 4, 2016

A Macro View – October Monthly Recap

Domestic equity markets were lower in October, moving in sympathy with a declining bond market and an unsettled presidential election campaign. Investors considered several factors, including an uptick in economic data and an increasingly likely interest rate hike by the Federal Open Market Committee (FOMC) at its upcoming December meeting. The employment situation was a positive, as employers added 161,000 jobs. The consensus among economists and analysts is that the FOMC will indeed raise rates at its next meeting. The futures market also is in agreement, currently implying a 78% probability of a rate hike. The presidential election campaign has also weighed on markets, as investors try to digest the twists and turns and how the various potential outcomes could affect the economy and markets.

Against this landscape, broad market indices were lower. The S&P 500 declined by -1.8%, and is now up +5.9% year-to-date. The Dow Jones Industrial Average (DJIA) also retreated, posting a loss of -0.8%. The tech-heavy Nasdaq Composite Index fell by -2.3%, and is now up +4.7% so far year-to-date. The Russell 2000 Index of small cap stocks underperformed the Russell 1000 Index of large cap stocks. Value stocks outperformed growth stocks, and have outperformed by more than 500 basis points year-to-date. In terms of sector performance, the top performers in the month were Financials, Utilities, and Information Technology, with returns of +2.3%, +0.9%, and -0.1%, respectively. Health Care and Telecommunication Services were the poorest performers, each posting returns of -6.5%. Commodities were little changed during the month, easing -0.5%. REITs had a challenging month, declining -5.6% in sympathy with the rise in interest rates.

International equity markets were also mostly lower, although there were pockets of positive returns. International developed markets performed in line with US indices. Europe continues to struggle with its recovery, and has been one of the only international markets posting a loss (-3.3%) through the first 10 months of the year. The MSCI World ex-U.S. Index declined by -1.9% for the month, and is now up +1.2% year-to-date through October. Emerging markets held their own, and performed well on a relative basis. The MSCI Emerging Markets Index posted a gain of +0.2% for the month, and is now up +16.3% year-to- date. The MSCI EAFE Index, which measures developed markets performance, gave back -2.1%. Regionally, Latin America and Eastern Europe were the best relative performers, advancing +9.9% and +1.6%, respectively. Europe and the Pacific region ex-Japan were the poorest relative performers, with declines of -3.3% and -2.1%, respectively.

Fixed-income markets were a mixed bag, with clear delineation drawn between the performance of government-related securities and credit obligations. The narrowing of credit spreads continued, as expectations of an inevitable FOMC rate increase pervaded the markets. Economic data is firming to such an extent that even though the FOMC stood pat both in September and at its November meeting this week, it is generally believed the committee will approve its second rate increase in a year. The yield curve steepened somewhat, reversing a recent trend, as yields on intermediate-term maturities rose more than those on short-term maturities. Within this environment, the yield on the 10-year U.S. Treasury note ended the month at 1.83%, up 23 basis points from 1.60% on September 30. Performance of broad-based fixed income indices was mixed again in October, with the Barclays U.S. Aggregate Bond Index declining -0.8% for the month. Global fixed income markets did not perform well, with the Barclays Global Aggregate ex-U.S. Index plunging -4.4%. Intermediate-term corporate bonds eased, as the Barclays U.S. Corporate 5-10 Year Index declined by -0.6%. The Barclays U.S. Corporate High Yield Index gained +0.4%. Municipals performed poorly, declining by -1.1% for October.

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