The eye of the storm
While Hurricane Florence impacted the Carolinas in September, the markets had their own whirlwind of events to contend with during the month with trade continuing to hold center-stage. The U.S. imposed a 10% tariff on $200B of Chinese imports on September 24 with the rate scheduled to increase to 25% in January. As expected, China responded in-kind with retaliatory tariffs to go into effect at the same time on $60B of goods, which would mostly affect U.S. gas exports, at a rate between 5 and 10%. Over the final weekend of the month, the U.S. and Canada reached an agreement on the rewrite to North American Free Trade Agreement (NAFTA), branding the agreement as United States–Mexico–Canada Agreement (USMCA). Incorporated in the agreement were certain provisions impacting automobile imports, auto factory wage requirements, and provisions against any of the three members from negotiating trade deals with “non-market economies” such as China.
Now, however, U.S. Economic and Business Sentiment measures continue to make the case for a strong economy. Q2 gross domestic product (GDP) was reconfirmed at 4.2%, Small Business Optimism and Business Outlook surveys continue to surprise on the upside, and Institute for Supply Management (ISM) is the first and largest not-for-profit professional supply management organization worldwide. New Orders and Manufacturing measures rose from their prior levels. The latest Durable Goods orders reported above the 2.0% survey expectations to come in at 4.5% versus 1.7% from the prior report.
On the labor side, the unemployment rate remained unchanged at 3.90% and payrolls surprised on the upside to a level of 201k. Initial jobless claims remained flat from the prior month and continuing claims saw a net reduction. Nonfarm payrolls also surprised by 11k to report 201k versus 157k.
While CPI came in slightly weaker than expected, Personal Consumption remained unchanged at 3.80%. Given the strong labor market and strengthening economy, the Fed raised rates as expected by 0.25% to 2.25%. This is the third-rate increase in 2018 and brings short-term rates to the highest level since September 2008.
While September followed the 3rd best summer since the Financial Crisis, the tech heavy large-cap S&P 500 returned 0.57% while the small-cap Russell 2000 reversed course to underperform with -2.41%. The U.S. bond market also showed some weakness coming in at -0.64% as the U.S. 10-year yields crossed over 3% in mid-September to close at 3.06% at the end of the month. As we’ve continued to see this year, with rates continuing to rise and business sentiment remaining upbeat, Investment Grade credit has been underperforming relative to High Yield debt, returning -0.34% and 0.54% respectively.
The U.S. dollar strengthened in September and both West Texas Intermediate (WTI) and Brent Crude reached respective highs during the month to help drive the Bloomberg Commodity Index to a 1.92% gain. International developed markets, as measured by the MSCI EAFE Index, outperformed the U.S. by posting an 0.87% return while the MSCI Emerging Markets Index continues to experience headwinds coming in at -0.53%.
Hedge Fund Research reported that Hedge Fund liquidations have fallen to the lowest level since 2007. Of the eight broad hedge fund strategies, Distressed Debt, Relative Value, and Convertible Arbitrage strategies posted positive returns in September. Equity Hedge and Merger Arbitrage strategies posted the weakest returns at -1.63% and -1.21% respectively.1
Key Economic Data1
- The U.S. Bureau of Economic Analysis (BEA) second quarter 2018 GDP was reaffirmed at 4.2%. Real GDP grew by 2.0% in the first quarter of 2018, 2.9% in the fourth quarter of 2017, and 3.2% in the third quarter of 2017.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was at 0.2%. Core inflation (CPI-Ex Food and Energy) came in at 0.1%. For the last 12 months, the CPI-U NSA was 2.7% and the CPI-Ex Food and Energy was 2.2%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm payrolls changed by 201,000 compared to the prior change of 157,000. Private sector payroll employment gained 204,000 compared to 170,000 from the prior period. The unemployment remained at 3.9%. The underemployment rate also declined by 0.1% to 7.4%. The labor force participation rate declined by 0.20% to 62.7%.
- 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 up 3.5% to 629,000. Housing starts were up by 9.2% to 1,282K from 1,168K. Building permits were up 1.5% to 1,311K. Existing home sales were flat remaining at 5.34 million units.
- The Conference Board Consumer Confidence IndexTM was 138.4.
1. IndexIQ, FactSet, as of 9/30/18.
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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.
Foreign securities can be subject to greater risks than U.S. investments, including currency fluctuations, less liquid trading markets, greater price volatility, political and economic instability, less publicly available information, and changes in tax or currency laws or monetary policy. These risks are likely to be greater for emerging markets than in developed markets.
Small and mid-cap stocks are often more volatile than large-cap stocks. Smaller companies generally face higher risks due to their limited product lines, markets and financial markets.
Index performance is shown for illustrative purposes only and does not predict or depict the performance of the Funds. Indices are unmanaged, include the reinvestment of dividends, and cannot be purchased directly by investors. Past performance does not guarantee future results.
Treasury Securities are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.
The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months, and pays the face value to the holder at maturity.
Brent Crude is a major trading classification of sweet light crude oil that serves as a major benchmark price for purchases of oil worldwide.
A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
The 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 U.S. economy that consumers are expressing through their activities of savings and spending.
The Consumer Confidence Survey® reflects prevailing business conditions and likely developments for the months ahead. This monthly report details consumer attitudes and buying intentions, with data available by age, income, and region.
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.
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 which 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.
Distressed securities are securities over companies or government entities that are experiencing financial or operational distress, default, or are under bankruptcy.
Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.
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.
FAANG is an acronym for the market’s five most popular and best-performing tech stocks, namely Facebook, Apple, Amazon, Netflix and Alphabet’s Google.
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.
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.
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.
MSCI EAFE Index consists of international stocks representing the developed world outside of North America.
MSCI Emerging Markets Index is an index created by Morgan Stanley Capital International (MSCI) designed to measure equity market performance in global emerging markets.
The North American Free Trade Agreement (NAFTA) is an agreement among the United States, Canada and Mexico designed to remove tariff barriers between the three countries.
Personal consumption expenditures (PCE), or thePCE Index, measures price changes in consumer goods and services.
Relative-value arbitrage is an investment strategy that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two securities.
The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.
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.
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.
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.
The United States–Mexico–Canada Agreement (USMCA) is a pending free trade agreement between Canada, Mexico, and the United States. It is also referred to as “NAFTA 2.0”, in order to distinguish it from its intended current predecessor North American Free Trade Agreement.
West Texas Intermediate (WTI) crude oil is the underlying commodity of the New York Mercantile Exchange’s oil futures contracts. Light, sweet crude oil is commonly referred to as “oil” in the Western world.
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.
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