Global Markets Push Higher
Global markets continued their theme from September as they pushed higher, with domestic indices hitting all-time highs on multiple trading days throughout the month. Performance gains were led by strong results from the Information Technology, Industrial, and Financial sectors. The U.S. economy continued to pick up steam, as gross domestic product (GDP) was reported at 3.0% for the third quarter of 2017, despite the fact that employment numbers were affected by the hurricanes that hit Texas and Florida. October also produced positive Q3 earnings, where a majority of the sectors in the S&P 500 Index beat estimates to the upside.
The Senate was able to pass a budget resolution, which was a significant step for the Republicans and their tax reform proposal, as they can now pass a tax bill with a simple majority and no support from the Democrats. Markets patiently waited for the appointment of the next Fed Chair, which became a two-man race between Jay Powell and John Taylor, with Powell eventually receiving the nomination to replace Chairperson Yellen when her term expires in early 2018.
Internationally, China saw a slowdown in economic activity, as the index that measures China’s factory activity (China Leading Economic Index) fell from the month prior. European markets also showed gains throughout the month on positive earnings and strong economic data, which presented growth in GDP above expectations, as well as unemployment rates at their lowest levels in years. The European Central Bank (ECB) also announced it would be cutting its monthly bond purchasing program in half to €30 billion and would remain at those levels until next September.
The reflation trade theme remained in focus throughout the month, as the dollar strengthened against most major currencies and the central bank continued with its hawkish forecast. The yield curve continued to climb to its highest levels in months, while credit spreads bounced around, before finishing the month at increased levels.
On the economic front, the advanced estimate of third-quarter GDP was 3.0%, which came in above expectations. Headline inflation remained flat at 1.7%. Employment gains were positive and came in below expectations. Consumer confidence increased and came in above expectations.
Hedge funds posted mixed results, with the broad index (HFRI Hedge Fund of Funds Index) up for the month. Five out of the eight strategies had positive returns, with Global Macro leading the way, up 1.92%. Three strategies posted negative returns for the month, with Distressed Restructuring posting the largest loss, down -0.69%.1
Key Economic Data2
- The U.S. Bureau of Economic Analysis (BEA) released the “advanced” estimate of real gross domestic product (GDP) growth of 3.0% in the third quarter of 2017. Real GDP grew by 3.1% in the second quarter of 2017, 1.2% in the first quarter of 2017, and 2.1% in the fourth quarter of 2016.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was up .5%. Core inflation (CPI-Ex Food and Energy) was 0.1%. For the last 12 months, the CPI-U NSA was 2.2%, 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 decreased by -33,000, after adding a revised 169,000 jobs in the prior month. Private sector payroll employment lost -40,000 jobs, following a revised increase of 164,000 jobs in the prior month. The unemployment rate was 4.2%. The underemployment rate was 8.3%. The labor force participation rate was 63.1% 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 667,000, a change of 19.1%. Housing starts were 1,127K, a change of -4.5%. Building permits were 1,215K units, a change of -6.5%. Existing home sales were 5.39 million units, a change of .7%.
- The Conference Board Consumer Confidence Index® was 125.9.
1. IndexIQ, Factset as of 10/31/17.
2. IndexIQ, Factset as of 10/31/17.
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All investments are subject to market risk, including possible loss of principal. Diversification cannot assure a profit or protect against loss in a declining market. Investors cannot invest directly in a benchmark.
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.
Distressed/Restructuring strategies employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.
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.
China Leading Economic Index – In China, the Leading Index is used to forecast the future economic trend. The index is based on a group of eight indicators reflecting different aspects of economic activity including: Hang Seng China Mainland circulation index, investment in newly started project, ratio of industrial production, real estate development leading index, money supply M2, national debt interest rate spread, consumer expectations index, logistics Index. The index has a base value of 100 as of 1996.
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 S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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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