PMC Weekly Review – December 7, 2018

A Macro View – November Monthly Recap
Domestic equity markets ended the month of November in positive territory, despite continued volatility that was introduced by the previous month’s sell-off. Equity markets began the month with uncertainty leading into the midterm election, but rallied on the back of the Democrats’ victory in the House of Representatives. Although the “buy the dip” mantra remains in effect for many investors, the focus on risk is increased, as continued trade tensions, geopolitical uncertainty, substantial buildup of corporate debt, and historically high valuations are making investors uneasy. Despite a strengthening labor market, expanding economic activity, increased job creation, and a declining unemployment rate, the Federal Open Market Committee decided to maintain the target range for the federal funds rate at 2.00% -2.25%, but left the door open for “further gradual increases” to the target rate. In a speech at the Economic Club of New York, Federal Reserve (Fed) Chairman Jerome Powell stated that the current policy rate is now “just below” a neutral rate that neither speeds up nor slows down the economy, signaling to some market participants that the Fed’s tightening cycle may be coming to an end.

For the month of November, the S&P 500 Index and the DJIA returned 2.0% and 2.1%, respectively. Within domestic stocks, large cap outperformed small cap equities, as the Russell 1000 Index returned 2.0% and the Russell 2000 returned 1.6%. Mid cap stocks outperformed small and large caps, with the Russell Mid Cap Index gaining 2.5%. Value stocks outperformed growth stocks for the second month in a row, with the Russell 3000 Value Index returning 2.9% compared with 1.1% for the Russell 3000 Growth Index. Sector performance was mixed, with the Health Care and Real Estate sectors generating the best results, returning 7.0% and 5.6%, respectively, whereas Information Technology and Energy struggled the most, returning -1.9% and 1.7%, respectively. The Bloomberg Commodity Index posted negative returns of -0.6%, as crude oil plummeted more than 20% in the month.

International equity markets underperformed relative to their domestic counterparts, marking seven consecutive months of underperformance, as the MSCI ACWI ex-U.S. Index returned 1.0% for the month of November. Amidst the increased volatility within the international equity markets came a voice of concern from the European Central Bank (ECB), just as it announced that it will pause its asset purchase program leading into the Christmas and New Year’s holidays to avoid creating distortion within the markets. In particular, the ECB is apprehensive about China’s slowing economic growth, and it worries that any further contraction from the world’s second-largest economy will threaten European markets. Furthermore, rising US interest rates place added strain on highly indebted foreign currency borrowers, which may negatively affect European markets. International developed equities and emerging markets equities diverged in performance for the month, as the MSCI EAFE Index was down 0.1% and the MSCI EM Index was up 4.1%.

Fixed income markets posted mostly positive returns across the asset class, as spreads widened for the month of November. The yield curve flattened slightly, as the yield on the 3-month Treasury Note ended the month three basis points higher, whereas the yield on the 10-Year Treasury Note declined by 14 basis point. The Fed reduced its fourth quarter gross domestic product forecast to an annualized rate of 2.6%, concerned that the slowing rate of business fixed investment, weakened consumer confidence, and cooling housing markets could lead to a slowdown in economic growth. Economic data shows a sustained labor market, as the unemployment rate remains at a 49-year low of 3.7%.The Bloomberg Barclays U.S. Aggregate Bond Index and US government securities rose 0.6% and 0.9%, respectively, as longer-maturity bonds outperformed shorter ones. High yield was the worst-performing space within fixed income, returning -0.9% over the month. Investment grade corporates also struggled, ending the month down 0.2%. Global bonds trailed their domestic fixed income counterparts, as the Barclays Global Aggregate ex-U.S. Index returned 0.3%. Emerging markets debt experienced some weakness, returning -0.5%. Municipal bonds posted positive returns, outperforming their taxable counterparts, with the Bloomberg Barclays Municipal Index returning 1.1% for the month. Within the municipal space, the longer-term securities posted better returns, with the 22+ Year Index beating the 1-2 Year Index by 94 basis points.

Scott Keller
Portfolio Manager

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