Commentaries
PMC Weekly Review -October 2, 2015
A Macro View – September Monthly Recap
Domestic equity markets continued to decline during the month, as investors reacted to the ongoing losses in Chinese equities and the Federal Reserve’s decision not to raise interest rates at its recent meeting. Stocks also are confronting negative seasonal headwinds, as September and early October are historically two of the most disappointing periods for stocks. Chinese equity markets remain mired in a downward spiral that began earlier this summer. With China’s slowing growth, policymakers devalued the Chinese currency in order to boost exports. Investors perceived the devaluation as confirmation that authorities were concerned about future growth prospects.
The Fed’s decision not to initiate the so-called “lift-off” also caused investor consternation, as many had anticipated that the Fed would finally begin to normalize rates. In its statement, the Fed mentioned global growth concerns and the recent financial market distress as reasons it would refrain from moving at that particular time. However, many analysts continue to believe the Fed will vote to raise rates sometime before the end of the year.
Within this landscape, stocks gave up ground once again in September. The S&P 500 fell by -2.5% for the month, and is down -5.3% year-to-date. The Dow Jones Industrials (DJIA) posted a more modest decline of –1.4% for the month. The tech-heavy Nasdaq Composite Index slumped -3.2% in September. Continuing a recent trend, the Russell 2000 Index of small cap stocks underperformed the Russell 1000 Index of large cap stocks, with returns of –4.9% and -2.7%, respectively. Growth stocks again underperformed value stocks during the month. In terms of sector performance, the top performers in the month were utilities, consumer staples and consumer discretionary, with returns of +2.9%, +0.5% and -0.6%, respectively. Materials and energy were the poorest performers, with returns of -7.4% and -6.7%, respectively. Commodities also posted another month of dismal performance, declining -3.4%. REITs bucked the trend, and advanced +3.4%.
International equity markets also fared poorly in September, dropping more than U.S. markets. Consumer prices fell during the month, marking the first time that occurred since the European Central Bank (ECB) instituted its asset-purchase program earlier in the year. Investors feared that further declines would create a deflationary spiral, and are urging the ECB to step up its stimulus. The MSCI World ex-U.S. Index declined -5.0% for the month, and is now down -6.2% year-to-date. Emerging markets were also hit hard, being negatively affected by the ongoing deterioration in commodities prices. The MSCI Emerging Markets Index fell by -3.0% for the month, and the MSCI EAFE Index, which measures developed markets performance, was down -5.0%. Regionally, Asia generated the best relative performance, but still dropped -1.5%. Latin America was the poorest performer, plummeting -7.7% during the month.
Fixed income markets fared somewhat better than equity markets during September, with every major segment except for high yield delivering modestly positive returns. Given the disruption and volatility in equities, along with the Fed’s decision to delay a rate hike, Treasury prices gained ground during the month. Within this environment, the 10-year U.S. Treasury yield ended the month at 2.06%, down 14 basis points from the 2.20% level of August 31st. Broad-based fixed-income indices were higher in September, with the Barclays U.S. Aggregate Bond Index advancing +0.7% for the month. Global fixed-income markets posted a second consecutive monthly gain of +0.4%. Intermediate-term corporate bonds were modestly higher, as the Barclays U.S. Corporate 5-10 Year Index edged up by +1.00%. The Barclays U.S. Corporate High Yield Index declined by -2.6%, and are down -4.9% over the past three months. Municipals fared well again, advancing +0.7% for September.
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