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%

Download the full PDF

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.

Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.

Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2018 Envestnet. All rights reserved.