Santa’s Sleigh Had a Flat Last Year

by: , Chief Investment Officer and Managing Director | IndexIQ; Mark Lacuesta, FRM, CAIA, CIPM, Director of Index Strategies, IndexIQ

December began with positive expectations, benefiting from a string of trading days from the final week in November. With eight of the last ten December months posting positive returns, the chances were favorable for another ‘Santa Clause’ Rally.

Unfortunately, this did not come to pass. With the S&P 500 Index posting its worst December since 1931 at -9.03%, market breadth was confirmed with the Dow Jones Industrial Average down -8.59% and Nasdaq Composite down -9.48%. Other risk assets were down in December with the Russell 1000 Index down -9.11%, the Russell 2000 Index down -11.88%, and their Growth and Value blends also in negative territory, although Growth did outperform Value, which is to say Growth was less negative. Non-U.S. markets were also down with the MSCI EAFE Index down -4.83% and the MSCI Emerging Markets Index down -2.60%.

With the global markets on the “naughty list”, there was an overall flight to quality with U.S. Treasuries and Investment Grade credit posting positive December returns while the High Yield segment struggled to maintain its accrued positive 2018 performance to finish the year in negative territory. With the S&P 500 demonstrating that tail-risk still exists, investors should look to how 2018 ended to inform their outlook for 2019.

Initial economic reports released at the start of the month provided additional confirmation on the positive state of the economy. The ISM Manufacturing Index rebounded, mainly from new orders, to reflect the strength of domestic demand. The ISM Production Index also rose in a complementary level to accompany manufacturing.

Employment figures remained positive, with a 155,000 gain in payrolls. While the figure was below consensus forecasts, the unemployment rate remains unchanged at 3.7% while hourly wage growth increased 0.2% month-over-month.

Consumer spending rose 0.3% month-over-month, in-line with the 0.9% month-over-month increase in retail sales. While these sales figures reflect the drop-in energy related sales due to the fall in oil prices, the reduction in energy prices served as a consumer spending boost. Headline CPI also declined due to falling oil, but core CPI remained stable.

The Fed followed through on its expected rate increase at the end of the despite the President’s vocal dissatisfaction over the increases and Powell as Fed Chair.

Trade continues to remain a dominant theme with the G-20 Summit taking place at the start of the month. While there, the President signed the USMCA agreement and met with President Xi of China. A Tweet touting a trade truce placed a 90-day hold on the scheduled tariff increase going from 10% to 25% provided China increases it purchase of U.S. commodity goods and industrial products.  Negotiations for a longer-term agreement are being chaired by U.S. Trade Representative Lighthizer, with a focus on forced technology transfer, IP protection, non-tariff barriers, cyber intrusion, cyber theft, services, and agriculture. While the arrest of the CFO of Chinese based Huawei of violating Iran sanctions has been portrayed by negotiators as having no influence on the negations, the coincident timing did create a distraction.

While negotiations have been taking the place, the Trump Administration intended to pursue separate charges against China, accusing it of economic espionage by of stealing trade secret and advanced technologies from companies like Hewlett-Packard and IBM. Both countries accused each other of the trade crises at the World Trade Organization (WTO). As the month progressed, White House trade advisor Navarro said that reaching an agreement within the 90-days would be “difficult” but qualified the statement placing the onus on China to overhaul its trade and industrial practices.  In response, China has gone on to say they are simply unsure of what the U.S. wants.

To complicate matters, the partial government shutdown was unable to be averted, with funding for the President’s immigration polices failing to secure funding. With 800,000 Federal workers furloughed until the government re-opens, the duration could have a lasting impact on the overall economy if allowed to continue for an extended period.

As the economy, markets, and government continue their interrelated paths, investors may want to consider their full investment opportunity set in 2019. In addition to performance of the equity and fixed income markets, the eight broad hedge fund strategies, as represented by their respective HFR index proxies, captured a fraction of the market downside in December with Global Macro posting a 0.77% gain. The other seven strategies include Long/Short (-4.23%), Market Neutral (-0.43%), Event Driven (-1.18%), Merger Arbitrage (-0.39%), Relative Value (-2.02%), and Convertible Arbitrage (-1.05%).

Key Economic Data:

  • The U.S. Bureau of Economic Analysis (BEA) third quarter 2018 GDP was 3.4%. 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 0.0%. Core inflation (CPI-Ex Food and Energy) came in at 0.2%. For the last 12 months, the CPI-U non-seasonally adjusted was 2.2% 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 155,000 compared to the prior change of 250,000. Private sector payroll employment changed by 161,000 compared to 246,000 from the prior period. The unemployment rate is unchanged at 3.7%. The underemployment rate increased by .2% to 7.6%. The labor force participation rate remained unchanged at 62.9%.
  • The U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau jointly announced that housing starts were up 3.2% to 1,256K from 1,228k. Building permits were up 5.0% to 1,328K. Existing home sales were up 1.9% to 5.32 million units.
  • The Conference Board Consumer Confidence Index (CCI) was 128.1.

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.

Key terms and definitions

The S&P 500® Index is widely regarded as the standard index for measuring large-cap U.S. stock market performance.

The Dow Jones Industrial Average is a stock market index that indicates the value of 30 large, publicly owned companies based in the United States, and how they have traded in the stock market during various periods of time.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The Russell 1000 Index is a stock market index that tracks the highest-ranking 1,000 stocks in the Russell 3000 Index, which represent about 90% of the total market capitalization of that index.

The Russell 2000 Index is a small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index.

The MSCI EAFE Index consists of international stocks representing the developed world outside of North America.

The MSCI Emerging Markets Index measures equity market performance in global emerging markets.

The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute for Supply Management (ISM) and monitors employment, production, inventories, new orders and supplier deliveries.

The ISM Production Index is a subset of the ISM Manufacturing Index.

The USMCA is a trade agreement between the United States, Canada and Mexico signed on November 30, 2018.

The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. The goal is to ensure that trade flows as smoothly, predictably, and freely as possible.

The HFR Equity Hedge Index measures strategies that 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.

The HFR Equity Market Neutral Index measures strategies that employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale.

The HFR Event Driven Index measures strategies that are designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.

The HFR Distressed/Restructuring Index measures 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.

The HFR Merger Arbitrage Index measures strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction.

The HFR Macro Index measures strategies that 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.

The HFR Relative Value Index measures strategies 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 HFR Convertible Arbitrage Index measures strategies often employed by hedge funds that involve the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.

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 Consumer Price Index for All Urban Consumers (CPI-U) measures the changes in the price of a basket of goods and services purchased by urban consumers.

The Consumer Price Index for All Urban Consumers Ex Food and Energy (Core CPI) is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy is widely used by economists because food and energy have very volatile prices.

The Consumer Board 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.

About Risk

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.

New York Life Investments is a service mark and name under which New York Life Investment Management LLC does business. New York Life Investments, an indirect subsidiary of New York Life Insurance Company, located at 51 Madison Avenue, New York, NY 10010, provides investment advisory products and services. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs, and NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

Full Bio

Mark Lacuesta, FRM, CAIA, CIPM

Director of Index Strategies, IndexIQ

Mark is Director of Index Strategies at IndexIQ where he is responsible for overseeing IndexIQ’s proprietary and third-party indexes underlying the firm’s ETF offerings. In this role, Mark is involved with research, product development, trading, sales, and marketing

Full Bio

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