PMC Weekly Review - December 1, 2017
Domestic equity markets continued their move higher in November, with the major US indices closing the month at or near record-level territory. The S&P 500 Index, Dow Jones Industrial Average (DJIA), and NASDAQ Composite Index all closed the month at record levels. The DJIA surged above the 24,000 threshold for the first time ever. The past month has been largely focused on Congress’s debate over, and its potential to pass, tax reform legislation. Volatility remained at very subdued levels throughout the month as the prolonged bull market in equities has continued. The second estimate of third-quarter gross domestic product showed the US economy grew at a 3.3% annualized rate, which was the strongest reading since third quarter 2014. The growth reading was above both the 3.2% expectation and October’s 3% advance reading. One nontraditional investment that was heavily discussed across the industry was the parabolic rise of the cryptocurrency Bitcoin, which shot above $10,000 during November, with price gains of over $3,000, or +51% for the month. Bitcoin prices have surged roughly 10-fold since starting 2017 at $1,000, while many debate its potential future use, the applicability of the blockchain technology, or whether it is merely another bubble ready to burst.
The S&P 500 Index gained +3.1%, pushing its year-to-date return to +20.5%, while the NASDAQ Composite Index posted slightly weaker returns of +2.3% but improved its year-to-date gain to +29.0%. The S&P 500 has now finished higher for 13 consecutive months, which is its best consecutive monthly run since the period March 1958-May 1959. Large cap domestic stocks slightly edged out small cap equities, as the Russell 1000 Index was up 3.1% and the Russell 2000 Index gained +2.9%. Mid cap stocks performed well, with the Russell Mid Cap Index gaining +3.4%. Growth and value stocks mostly traded in line with each other, with only 2 basis points separating the Russell 1000 Value Index’s return of +3.06% and the Russell 1000 Growth Index’s return of +3.04%. However, in a year-to-date comparison, growth stocks have maintained their dominance, with a difference of more than 1700 basis points in the year-to-date returns of the Russell 1000 Growth Index and the Russell 1000 Value Index: +29.2% and +12.0%, respectively. In terms of sector performance, Telecommunications was the strongest performer, gaining +6%, followed by Consumer Staples, which gained +5.7%. Materials and Information Technology were the main laggards from a relative standpoint, gaining only +1.0% and +1.2%, respectively. While Information Technology trailed most other sectors in November, the sector’s year-to-date +38.8% gain remains impressive, outpacing Healthcare’s +22.9% year-to-date return, the second-best performing S&P 500 sector, by nearly 1600 basis points. Energy prices rose, but metals were mostly lower, leading the Bloomberg Commodity Index to finish -0.5%.
International equity markets, for the most part, slightly trailed, on a relative basis, the strong gains experienced by domestic equities. The MSCI ACWI ex-U.S. Index increased by +0.8% for the month and is now up +24.4% year to date. International developed markets performance cooled slightly in November, but Eurozone growth expectations remain high for both the fourth quarter and for 2018. Eurozone companies have also boosted hiring at the fastest pace in 17 years, as economic data and the overall sentiment has continued to improve. The MSCI EAFE Index, which measures performance of international developed equities, gained +1.1%. Taking a breather from an already very strong year, emerging markets equities trailed on a relative basis, gaining +0.2%, but their year-to-date gain still clocks in at +32.5%, leading major asset classes. EM Latin America was the key laggard, posting a loss of -3% for the month. Regionally, Japan was a strong performer, gaining +3.0%, while Europe posted a lower result, gaining +0.2%. China continued the strength it has shown this year, gaining +1.6%, and the MSCI China Index is now up +51.2% year to date.
Fixed-income markets traded mostly lower for the month, as yields moved higher. The yield on the 10-Year Treasury Note closed out November at 2.41%, adding 4 basis points from 2.37% at the end of October. Odds for a December federal funds rate hike have increased to a near certainty, roughly a 96% likelihood, for a third increase this year. Federal Reserve Governor Jerome Powell was nominated by President Trump to succeed Janet Yellen in early February as Chair of the Federal Reserve. The Barclays U.S. Aggregate Bond Index fell by -0.13% for the month, and is now up +3.1% year to date. Global bonds continued their outperformance of domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index gained +2.1%, and is now up +10.2% year to date. Municipal bonds posted slight losses comparable to their taxable peers, losing -0.5%, and are now up 4.4% year to date. High yield fixed income posted weaker results than the Barclays U.S. Aggregate Bond Index, with a loss of -0.3%.