PMC Weekly Review – January 7, 2019
A Macro View – December Monthly Recap
In the domestic equity markets, December closed out a terrible fourth quarter, as concerns over slowing economic growth, rising borrowing costs, global trade tensions, and uncertainty around the change in control of the US House of Representatives all pushed investors to reconsider the risk in their portfolios and forced US stocks sharply lower. The Energy and Financials sectors, more heavily represented in the value style indices, were the worst performers for the month. Crude oil prices continued their plummet from their August peak, down 12% in the last 30 days of the year. The Federal Reserve’s (the Fed) fourth hike of 2018 in early December and a falling stock market in the first two months of the quarter dimmed the outlook on many banks and asset management firms. Falling interest rates helped dividend-paying companies, particularly in the Real Estate and Utilities sectors, but overall the value style indices underperformed the growth style indices in December.
The Russell 1000 Growth Index declined by 8.6% in December, modestly outperforming the 1000 Value Index, which was down 9.5%. The gap was a bit wider in the mid cap space, as the Russell Midcap Growth Index, down 9.1%, outperformed the value index by roughly 1.5%. Finally, there was little disparity among small cap stocks, hardest hit of the domestic equity segments, as the Russell 2000 Growth Index was down 11.7%, just 40 basis points ahead of the value index. Prior to a slight rebound at the end of the month, the small cap index was down more than 20% from its August high, the third such correction since the beginning of 2009. The Bloomberg Commodity Index as a whole was down 6.9%, and the Dow Jones U.S. Select REIT Index was down 8.6% for the month.
The international equity markets weakened significantly during December, following US markets’ decline, but to a much lesser degree. Although the non-US markets had their own significant concerns, valuations as of the end of the third quarter did not have the same level of expected growth built in as was the case in the US. Europe is struggling to get a full picture of how Brexit will play out by the March 2019 deadline for a deal. Uncertainty abounds, as Prime Minister Theresa May failed to gain Parliamentary support for her negotiated exit of the European Union. Europe is now facing a real possibility of a no-deal Brexit, threatening further uncertainty for investors over the near future. The emerging markets continue to be dominated by the economic worries in China. Retail sales growth and manufacturing activity slowed in November, the first signs of the economic impact of the ongoing trade dispute with the US.
The EAFE Index fell 4.85% for the month, but managed to outperform broad US markets. Emerging markets equities also fell in value, but fared even better, down just 2.66%. Currencies had a muted impact on emerging markets returns, but contributed positively to returns for developed markets, as the US dollar weakened and bolstered non-US developed markets returns by 1.00%.
The domestic fixed income markets were a mixed bag in December, as Treasury rates rallied, but credit spreads widened. Despite the Fed’s midmonth rate hike, the global sell-off in risk assets increased the demand for quality fixed income securities. December was also the slowest month for corporate new issuance in more than 20 years. US corporations issued just $8 billion in new investment grade bonds, and for the first time in more than a decade, there was no new issuance in the noninvestment grade corporate market in December. The municipal market continues to have a significant supply/demand imbalance as well, though not as stark as it was in the first part of the year. The City of Detroit came back to the market for the first time since its bankruptcy, with a tax-backed GO issue in early December.
For the month, US Treasurys led the way, especially the longest maturities, up more than 2%, whereas the MBS Index was up 1.8%. The widening in spreads left the Credit Index up just 1.2%. Despite the strong fundamentals and supply/demand imbalance, the municipal market modestly underperformed the Treasury market, with the Municipal Index up 1.2%, though the 10-year portion of the curve was up nearly 1.4%. The global risk-off environment caused massive outflows from high yield bond and bank loan funds, and credit spreads widened by more than 100 basis points during the month. The High Yield Index was down more than 2%, and the S&P LSTA Leveraged Loan Index was down more than 2.5%
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