Commentaries

PMC Weekly Review - November 6, 2015

A Macro View – October Monthly Recap

Domestic equity markets rebounded sharply during the month, as global economic data stabilized, and fears of a spread to the U.S. economy dissipated. Helping to allay investor concerns has been the performance of Chinese equities, which have staged a powerful rally since plummeting during the summer. China was one of the world’s best performing markets in October, posting gains of more than 9%. Equities also have digested the fact that the Federal Reserve decided not to raise interest rates in September as many had anticipated. Recent statements by Fed officials indicate that the economy is showing enough signs of improvement that an increase before the end of the year is still on the table. Somewhat ironically, the market has applauded the possibility of a rate increase this year, likely because it would signal that the economy is on solid ground, and that after about seven years, the country is on a path to a more normal interest rate environment. Domestic economic data remained resilient during the month, with the latest estimate of third quarter real gross domestic product (GDP) coming in at +1.5%, slightly below expectations, and well under the 3.9% increase in the second quarter.

Within this context, stocks delivered strong gains. The S&P 500 surged by +8.4% for the month, and is now up +2.7% year-to-date. The month’s advance marked the S&P’s strongest monthly performance since October 2011. The Dow Jones Industrial Average (DJIA) also climbed, advancing +8.6%. The tech-heavy Nasdaq Composite Index jumped +9.4%. The Russell 2000 Index of small cap stocks again underperformed the Russell 1000 Index of large cap stocks, with returns of +5.6% and +8.1%, respectively. Growth stocks outperformed value stocks during the month. In terms of sector performance, the top performers in the month were materials, energy and information technology, with returns of +13.5%, +11.4% and +10.8%, respectively. Utilities and consumer staples were the poorest performers, with returns of +1.1% and +5.6%, respectively. Commodities continued their downward trend during the month, declining -0.5%. REITs generated gains, advancing by +5.8%.

International equity markets also fared well, slightly outperforming U.S. markets. The gains were distributed both broadly across regions and between developed and emerging markets. The MSCI World ex-U.S. Index gained +7.5%, and is now up +0.3% year-to-date. Although emerging markets found their footing in October, they still have underperformed over the past five years. The MSCI Emerging Markets Index posted gains of +7.1%, and the MSCI EAFE Index, which measures developed markets performance, was up +7.8%. Regionally, Japan and China generated the best relative performance, climbing +10.1% and +9.1%, respectively. The Eastern Europe region was the poorest relative performer, advancing by +3.8%.

Fixed income markets were mixed, as investors have become comfortable with the idea that the economy is not going to succumb to a global economic slowdown, and that the Fed may indeed raise rates this year. As equity markets rallied, Treasury prices lost ground, reacting in part to various statements from Fed officials (including Fed chairman Janet Yellen) indicating that the economy is expected to continue to improve. Within this environment, the 10-year U.S. Treasury yield rose to 2.15%, up nine basis points from its 2.06% level of September 30th. Performance of broad-based fixed income indices was varied, with the Barclays U.S. Aggregate Bond Index advancing only +0.02%. Global fixed income markets delivered modest gains, as the Barclays Global Aggregate ex-U.S. Index added +0.3%. Intermediate-term corporate bonds were higher, and the Barclays U.S. Corporate 5-10 Year Index climbed by +0.5%. The Barclays U.S. Corporate High Yield Index advanced by +2.8%. Municipals fared well, gaining +0.4%.

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