PMC Weekly Review - October 7, 2016
Domestic equity markets edged slightly higher in September, holding their own in a seasonally disappointing month. Investors weighed several factors, including the Federal Open Market Committee’s (FOMC) decision to stand pat once again and not raise interest rates; modestly improving economic data; and the presidential election campaign. In the lead-up to its September meeting, several FOMC members had speculated that the committee would vote to raise rates. However, while there were more dissenters than in previous meetings, the committee ultimately decided to hold off until at least the next
meeting. With employment and other economic data starting to trend higher, the consensus among analysts is that the FOMC will implement a rate increase at its December meeting, barring an unforeseen dip in economic data. The futures market is also predicting a December rate hike. Today’s release of lower-than-forecast September payroll data should not alter rate-increase expectations.
Within this context, broad market indices were slightly higher during the month. The S&P 500 rose by +0.02%, and is now up +7.8% so far this year. The Dow Jones Industrials (DJIA) fell modestly, posting a loss of -0.4%. The tech-heavy Nasdaq Composite Index gained +2.0%, and had generated a +10.0% gain so far year-to-date. The Russell 2000 Index of small cap stocks outperformed the Russell 1000 Index of large cap stocks. Value stocks underperformed growth stocks during the month, and have outperformed by more than 400 basis points year-to-date. In terms of sector performance, the top performers in the month were energy, information technology, and utilities, with returns of +3.1%, +2.4%, and +0.4%,
respectively. Financials and consumer staples were the poorest performers, with returns of -2.7% and -1.5%, respectively. Commodities performed well during the month, gaining +3.1%. REITs fell -2.1% in September due to a less favorable interest rate environment.
International equity markets were generally higher in September, as most regions generated small gains. International developed markets also outperformed U.S. indices. European investors also continue to grapple with Brexit and its potential implications. The MSCI World ex-U.S. Index advanced by +1.2% for the month, and is now up +3.1% through the first nine months of the year. Emerging markets continued to recover nicely, due in part to the stabilization of commodities prices. The MSCI Emerging Markets Index posted a gain of +1.3% for the month, and is now up +16.0% on a year-to-date basis. The MSCI EAFE Index, which measures developed markets performance, climbed +1.2%. Regionally, the Pacific region ex-Japan and China were the best relative performers, advancing +2.7% and +2.5%, respectively. Latin America and Europe were the poorest relative performers, with a loss of -0.8% and a gain of +0.9%, respectively.
Fixed income markets delivered mixed performance in September, as the outlook for the interest rate environment continued to evolve. Investors considered several factors, including the FOMC’s decision to stand pat at its most recent meeting, and generally firming economic data domestically. As in previous recent months, the yield curve continued to flatten, as investors anticipate that a looming rate increase will push yields on short-term maturities higher than intermediate- and long-term maturities. The futures market is assigning a 64% probability of a rate hike at the FOMC’s December meeting. Within this environment, the yield on the 10-year U.S. Treasury note ended the month at 1.60%, up two basis points from the 1.58% level of August 31. Performance of broad-based fixed income indices was mixed in September, with the Barclays U.S. Aggregate Bond Index declining -0.06% for the month. Global fixed income markets performed better, with the Barclays Global Aggregate ex-U.S. Index climbing +1.0%. Intermediate-term corporate bonds were a bit higher, as the Barclays U.S. Corporate 5-10 Year Index inched up by +0.06%. The Barclays U.S. Corporate High Yield Index gained +0.7%. Municipals declined -0.5% for September.
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.
© 2016 Envestnet. All rights reserved.