Mr. Market’s Wild Ride
On the backend of the steep October drawdown, November started off with the uncertainty of the midterm elections. While there were expectations of a “Blue Wave”, the Democrats took the House and Republicans held the Senate. While the split legislature may cause some frictions regarding domestic policy, both parties seem to be on the same page regarding improving global trade policies. The Fed, as expected, kept rates unchanged in November raising the likelihood of a 4th rate hike in December. Following two consecutive down weeks in the middle of the month, November managed to build some positive momentum in the final week to post 2.04% to end November and raise the year-to-date for the S&P 500 Index to 5.11%. Markets were helped upward following Chair Powell’s late November speech which came across as more dovish compared to his October statements. His statements highlighting the Fed’s strong outlook for the economy also gave the market some confidence that the Fed may take a less aggressive stance on raising rates than previously thought. Trade concerns were in focus leading up to the G-20 Summit in Argentina with both the USMCA signing and the Trump-Xi meeting scheduled to occur that weekend.
3rd quarter preliminary labor productivity came in at 2.2%, above the survey estimate and 3rd Quarter GDP was confirmed at 3.5%. Changes in payrolls also came in above their October survey estimates at 250k (vs 200k) and 246k (vs 195k) for Nonfarm and Private payrolls. However, the November announcement by GM to reduce its workforce by 15% has sent some shocks to the affected regions of Ohio, Michigan, and Maryland. The final November initial jobless claim report rose to 234k from 224k.
Looking over the last 12 months, the VIX has moved to an elevated level since October, trending on average around 19.37 versus 14.67 for the earlier 10 months. While U.S. market volatility is becoming more evident in the U.S. equity market, other equity markets continue to lag the U.S.
The MSCI EAFE Index has been underperforming the U.S. year-to-date, posting a -0.11% in November to bring the YTD index down to -8.96%. While the MSCI Emerging Markets Index was up 4.13% in November, the index is still down -11.96% year-to-date. With Brexit fast approaching on March 29, 2019, Parliament will vote on Prime Minister May’s unpopular Brexit withdrawal agreement on December 11. The most unfavorable of the negotiated items is the agreement is the £39bn “divorce bill”. The MSCI UK Index finished November down -1.51% in GBP terms.
The U.S. yield curve has continued to flatten, as measured by the 2yr-10yr spread, with 19bps separating the two. High-Yield credit spreads have also risen over the last two months, causing some recent headwinds for high yield debt. Oil prices were down 22.02% in November and down 33.35% from the October 3, 2018 peak. With high oil inventories and the collapse in price, OPEC meets in December to agree on production levels. This, however, is counter to the President’s view on keeping oil prices low. The oil futures curve has shifted from backwardation to contango which may cause some headwinds for futures-based oil strategies.
Of the 8 hedge fund strategies tracked1, only Merger Arbitrage strategies performed positively in November.
Key Economic Data
- The U.S. Bureau of Economic Analysis (BEA) third quarter 2018 GDP was 3.5%. Real GDP grew by 4.2% in the second quarter of 2018, 2.0% in the first quarter of 2018, and 2.9% in the fourth quarter of 2017.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was at 0.3%. Core inflation (CPI-Ex Food and Energy) came in at 0.2%. For the last 12 months, the CPI-U NSA was 2.5% and the CPI-Ex Food and Energy was 2.1%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm payrolls changed by 250,000 compared to the prior change of 134,000. Private sector payroll employment changed by 246,000 compared to 121,000 from the prior period. The unemployment rate is unchanged at 3.7%. The underemployment rate decreased by .1% to 7.4%. The labor force participation rate increased 62.9%.
- 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 down -8.90% to 544,000. Housing starts were up 1.5% to 1,228K from 1,201. Building permits were down -0.6% to 1,263K. Existing home sales were up 1.4% to 5.22 million units.
- The Conference Board Consumer Confidence IndexTM was 135.7.
1. As calculated by HFR: Equity Hedge, Equity Market Neutral, Event Driven, Distressed, Merger Arbitrage, Macro, Relative Value, Convertible Arbitrage.
The information and opinions contained herein are for general information use only. New York Life Investments does not guarantee their accuracy or completeness, nor does New York Life Investments assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice and are not intended as an offer or solicitation with respect to the purchase or sales of any security or as personalized investment advice. There can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Past performance is no guarantee of future results. It is not possible to invest directly in an index.
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.
The USMCA is a trade agreement between the United States, Canada and Mexico signed on November 30, 2018.
The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange. It is colloquially referred to as the fear index or the fear gauge.
The MSCI EAFE Index consists of international stocks representing the developed world outside of North America.
The 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 MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. With 100 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in the UK.
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.
OPEC is the Organization of the Petroleum Exporting Countries is an intergovernmental organization of 15 nations, founded in 1960 in Baghdad by the first five members, and headquartered since 1965 in Vienna, Austria.
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.
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.
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.
Event Driven strategies are designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.
Equity Hedge strategies 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.
Global Macro strategies base 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.
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 HFRI Hedge Fund of Funds Index tracks diversified investments comprised of multiple funds with the objective of significantly lowering the risk (volatility) of investing with an individual fund. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio.
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