Mother Nature’s Market Impact
Global markets had a strong performance in September, with domestic indices lagging behind international. Earlier in the month, a string of natural disasters caused mixed results in the markets, as some sectors benefit, while others suffer from the outcome of the storms. President Trump was able to push through a Hurricane Harvey relief package and complete a deal with Congress to raise the debt ceiling and keep the government funded through December. While tensions with North Korea remained in the headlines, they had little effect on the markets, as the exchanges between the two countries have become a commonality. The Fed meeting provided announcements which were to be expected, including balance sheet reduction beginning next month, the expectation of one more rate hike in December jumped from 57% to 71%, and the possibility of three more hikes in 2018. The month closed out with tax reform dominating the headlines, as the “Big Six” released their tax reform blueprint, which calls for a corporate tax rate of 20%, which is down from the current 35%, but above the 15% President Trump has been pushing for. Some within the administration still believe tax reform can be passed in 2017 but markets remained relatively stable, as this has already been priced in.
The yield curve bounced around throughout the month before climbing to its highest levels in two months, due to reflation gaining momentum, caused by fiscal policy developments (tax reform blueprint) and hawkish forecasts by the central bank. This caused small caps to rebound strongly throughout the month, as they handily outperformed large caps. Credit spreads continued to decline throughout the month.
On the economic front, the advanced estimate of real gross domestic product (GDP) was 3.1%, which came in above expectations. Headline inflation remained flat at 1.7%. Employment gains were negative and came in below expectations. Consumer confidence declined and came in just under expectations.
Hedge funds posted primarily positive results, with the broad index (HFRI Hedge Fund of Funds Index) up for the month. Seven out of the eight strategies had positive returns with Equity Hedge and Event Driven leading the way. Global Macro was the only strategy to post negative returns.1
Key Economic Data2
- The U.S. Bureau of Economic Analysis (BEA) released the “third” estimate of real gross domestic product (GDP) growth of 3.1% in the second quarter of 2017. Real GDP grew by 1.2% in the first quarter of 2017, 2.1% in the fourth quarter of 2016, and 3.5% in the third quarter.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was up 0.4%. Core inflation (CPI-Ex Food and Energy) was 0.2%. For the last 12 months, the CPI-U NSA was 1.9%, and the CPI-Ex Food and Energy was 1.7%. For the last 12 months, the CPI-U NSA was 1.7% and the CPI-Ex Food and Energy was 1.7%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm jobs increased by 156,000, after adding a revised 189,000 jobs in the prior month. Private sector payroll employment added 165,000 jobs, following a revised increase of 202,000 jobs in the prior month. The unemployment rate was 4.4%. The underemployment rate was 8.6%. The labor force participation rate was 62.9% last month.
- The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that sales of new single-family houses were 560,000, a change of -3.4%. Housing starts were 1,180K, a change of -0.8%. Building permits were 1,300K units, a change of 5.7%. Existing home sales were 5.35 million units, a change of -1.7%.
- The Conference Board Consumer Confidence Index® was 119.8.
1. IndexIQ, FactSet, as of 9/30/17.
2. IndexIQ, FactSet, as of 9/30/17.
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“Big Six” – Six key tax reform policymakers who have been meeting on a regular basis to hash out some version of a tax overhaul that may be able to pass both the House and the Senate. The so-called “Big Six” are: Speaker of the House Paul Ryan (R-WI), House Ways and Means Committee Chair Kevin Brady (R-TX), Senate Majority Leader Mitch McConnell (R-KY), Senate Finance Committee Chair Orrin Hatch (R-UT), Secretary of the Treasury Steven Mnuchin, and Director of the National Economic Council Gary Cohn.
Large cap (sometimes “big cap”) refers to a company with a market capitalization value of more than $5 billion. Large cap is a shortened version of the term “large market capitalization.” Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its stock price per share. The dollar amounts used for the classifications “large cap,” mid cap” or “small cap” are only approximations that change over time.
Small cap is a term used to classify companies with a relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares.
A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
Convertible arbitrage is a market-neutral investment strategy often employed by hedge funds that involves the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.
A Global Macro strategy is a strategy that bases its holdings, such as long and short positions in various equity, fixed-income, currency, commodities, and futures markets, primarily on the overall economic and political views of various countries, or their macroeconomic principles.
Event Driven investing is designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.
Equity Hedge investing buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.
HFRI Hedge Fund of Funds Index – Fund of Funds invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.
The U.S. Consumer Price Index (CPI) is a set of consumer price indices calculated by the U.S. Bureau of Labor Statistics (BLS). To be precise, the BLS routinely computes many different CPIs that are used for different purposes. Each is a time series measure of the price of consumer goods and services.
Consumer Price Index For All Urban Consumers (CPI-U) – A measure that examines the changes in the price of a basket of goods and services purchased by urban consumers.
The U.S. Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
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