PMC Weekly Review – October 5, 2018
Domestic equities ended mixed for the month of September, as the S&P 500 finished in positive territory, whereas small cap stocks and even several large cap sectors experienced losses. With the continued upward trend for the S&P 500 Index, September brought new record highs for the index, although small caps ended the month in negative territory, falling from record highs set at the end of August. In light of the recent high, it may be worthwhile to reflect on how far stocks have come over the past decade, as September marked the ten-year anniversary of the start of the 2008 financial crisis. It also marks ten years since Lehman Brothers, a 158-year old company, was forced to file for bankruptcy protection, the largest US bankruptcy ever. For context, during the month of September 2008, the S&P 500 Index fell roughly 9% to 1,166. Ten years later, the index has climbed to nearly 3,000. However, the recent high valuations may be giving market participants pause, as they wonder how much longer this bull market can continue, especially as the Federal Reserve (Fed) continues to tighten monetary policy.
As was widely expected in September, the Federal Open Market Committee (FOMC) voted to increase the federal funds target range on overnight rates by 25 basis points, to a range between 2.00% and 2.25%, its third rate increase of the year. The trade wars continue to escalate, with China’s State Council accusing the Trump Administration of being a trade bully, as new tariffs on $200 billion worth of Chinese goods and China’s retaliatory on $60 billion worth of US products went into effect. Negotiations between the two countries have ceased for the time being, after Beijing decided not to send a delegation to Washington.
For the month, the S&P 500 Index and the Dow Jones Industrial Average (DJIA) returned 0.6% and 2.0%, respectively. This brings the year-to-date gain for the S&P 500 to 10.6% and the DJIA return to 8.8%. However, the tech-heavy NASDAQ declined by 0.7%, bringing its year-to-date return to 17.5%. Within domestic stocks, large cap outperformed small cap equities, as the Russell 1000 Index returned 0.4% and the Russell 2000 posted a loss of 2.4%. Mid cap stocks also outperformed small caps, with the Russell Mid Cap Index losing only 0.6%. Growth stocks continued to outperform value, albeit by a much slimmer margin, as the Russell 3000 Growth Index returned 0.3% compared with a flat month for the Russell 3000 Value Index. Sector performance was mixed, with the Telecommunications sector (which now becomes the Communication Services sector) had the best results, a gain of 4.3%, followed by Health Care at 2.9%, and Energy, which gained 2.6%. On the negative side of sector performance, Financials and Materials struggled, producing returns of -2.2% and -2.1%, respectively. The Bloomberg Commodity Index generated solid performance, with a return of 1.9%.
International equities snapped back from losses in August to post slight gains in September, as the MSCI ACWI ex USA Index gained 0.5% and MSCI EAFE gained 0.9%. European Central Bank (ECB) President Mario Draghi reported that the ECB will continue with plans to phase out monetary stimulus as wages and inflation increase. Additionally, Draghi reported that households across the eurozone have experienced their highest growth of disposable income over the last ten years. Although the eurozone economy has slowed slightly over the past year, labor markets remain tight, as some countries and sectors are showing labor shortages, leading the ECB to expect a pickup in inflation. The Brexit negotiations added to uncertainties in the international markets. British Prime Minister Theresa May reported that negotiations are at an impasse, and that Britain stands ready to leave the European Union before a deal is in place. Emerging markets continued to struggle, with a loss of 0.5% (a better return than in prior months), as MSCI Emerging Markets Latin America and MSCI Emerging Markets Eastern Europe added to results. On a year-to-date basis, emerging markets are down 7.7%. Regionally, Japan posted strong results in September, gaining 3.0%, whereas China, which declined 1.4%, continued its poor performance and brought its year-to-date return to -7.5%.
Fixed income experienced some weakness, with mostly negative returns across the asset class for the month of September. Although the Bloomberg Barclays U.S. Aggregate Bond Index fell 0.64% for the month, it had a positive return of 0.02% for the quarter, and declined 1.6% on a year-to-date basis. The yield on the 10-Year Treasury Bond increased by 21 basis points, despite a slight decrease after the Fed increased rates. Corporate high yield posted positive performance, returning 0.6% for the month, and bringing its year-to-date gain to 2.6%. Gross domestic product (GDP) increased at a 4.2% annualized rate over the second quarter, and the Fed estimates that GDP will increase to 3.1% for the full year. The employment figures in August were strong: The unemployment rate held at 3.9%, nonfarm payrolls grew by 201K, and average hourly earnings grew by 2.9%.
Global bonds trailed domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index declined 1.1%, bringing its year-to-date return to -3.0%. Municipal bonds also generated negative returns, and were roughly in line with their taxable counterparts, with the Bloomberg Barclays Municipal Index returning -0.7% for the month. Within the municipal space, the shorter-term securities fared better, with the 1-3 Year Index beating the 22+ Year Index by 64 basis points.
VP, Senior Portfolio Manager
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2018 Envestnet. All rights reserved.