PMC Weekly Review - January 8, 2016
Domestic equity markets were soft during the month, eschewing a “Santa Claus” rally for the second consecutive December. The key drivers of equity market performance were the Federal Open Market Committee’s (FOMC) decision to raise interest rates for the first time in nearly 10 years, and signs of an emerging credit bubble in China. In addition, many analysts point to the fact that while gains for the entire fourth quarter were positive, they were “front-loaded” in the month of October. As expected, the FOMC finally initiated the long-awaited “lift-off” of interest rates, raising the target level of the fed funds rate 25 basis points to 0.25%-0.50%. In its statement accompanying the move, the FOMC indicated that further rate increases would be gradual. The consensus among economists seems to be that the FOMC will raise rates at alternating meetings in 2016, for a total of four increases, bringing the total interest rate increase for the year to about 100 basis points. FOMC committee members have said that rate increase decisions going forward will be decided based upon data, and that there is no pre-determined plan. Domestic economic data showed modest growth during the month, with the third estimate of third quarter real gross domestic product (GDP) coming in at +2.0%, in line with the previous forecast, but well under the 3.9% increase in the second quarter.
Against this backdrop, stocks generated moderate losses during December. The S&P 500 declined by -1.6% for the month, and ended 2015 with a slight gain of +1.4%. The month’s decline marked the S&P’s worst December performance since 2002. The Dow Jones Industrials (DJIA) also dropped, shedding -1.5% for the month. The tech-heavy Nasdaq Composite Index gave back -1.9% in December. The Russell 2000 Index of small cap stocks significantly underperformed the Russell 1000 Index of large cap stocks, with returns of -5.0% and -1.8%, respectively. Growth stocks outperformed value stocks during the month. In terms of sector performance, the top performers in the month were consumer staples, utilities, and health care, with returns of +2.9%, +2.2% and +1.8%, respectively. Energy and materials were the poorest performers, with returns of -9.9% and -4.2%, respectively. Commodities resumed their downward trend during the month, declining -3.1%. REITs generated gains in December, advancing by +2.2%.
International equity markets also ceded ground in December, performing in line with U.S. markets. The losses affected most regions, as well as developed and emerging markets, with the exception of Japan. The MSCI World ex-U.S. Index declined -1.8% for the month, and finished with a -3.0% loss for 2015. Emerging markets had a difficult December, declining in sympathy with commodities. The MSCI Emerging Markets Index dropped -2.2% for the month, and the MSCI EAFE Index, which measures developed markets performance, was down -1.4%. Regionally, the Pacific region ex-Japan and Japan itself generated the best relative performance, climbing +2.2% and +0.3%, respectively. The Eastern Europe region was the poorest relative performer, declining by -7.3% during the month.
Fixed income markets were mostly lower in December, as investors assimilated and reacted to the FOMC’s announcement that it would begin raising interest rates. One of the results of the move was a rise in, and flattening of, the overall yield curve. The FOMC’s design is that additional, but gradual, rate increases will follow in 2016, but there is presently no plan to decrease the size of the central bank’s balance sheet. Within this environment, the 10-year U.S. Treasury yield ended the month at 2.27%, up 23 basis points from the 2.04% level of September 30th. Performance of broad-based fixed-income indices was generally lower in December, with the Barclays U.S. Aggregate Bond Index declining -0.3% for the month. Global fixed-income markets delivered modest gains, with the Barclays Global Aggregate ex-U.S. Index adding on +1.2%. Intermediate-term corporate bonds were lower, as the Barclays U.S. Corporate 5-10 Year Index fell by -0.8%. The Barclays U.S. Corporate High Yield Index dropped by -2.5%. Municipals fared well during the month, gaining +0.7% for December.
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