IndexIQ September 2019 commentary
- Despite some volatility to finish out the month, the S&P 500 index resumed its winning ways returning 1.87% in September. U.S. small caps followed a similar though more volatile path as large caps, returning 2.08%. Early October results have been testing this support on weaker economic data fueling growth concerns.
- Global markets rallied with the MSCI EAFE returning 2.87 % on expectations for a more accommodative monetary policy position. Emerging Markets slightly worse with the MSCI EM index returning 1.91%.
- The U.S. yield curve steepened ever so slightly with Long-Term yields rising modestly but still more than short-term yields, resulting in the 2 and 10-year yield spreads going slightly positive.
- The Bloomberg Barclays US Aggregate bond index was down -0.53% and the US Universal (US Aggregate plus High Yield) index returned -0.43%.
- The Bloomberg Barclays US Short Term Treasury index returned 0.16% while the ICE BoAML US Treasury 20 year+ Index returned -2.56%. The iBoxx Investment Grade Index returned -0.86% and the iBoxx High Yield Index was up 0.30%.
- Oil prices fell by -1.87%.
- In other commodities, Gold and Silver were down by -3.15% and -7.51% respectively. Copper rose 0.70% but Aluminum fell by -1.32%.
- 6 of the 7 tracked hedge fund strategies performed positively in August. Global Macro was the only negative performing strategy. Equity Market Neutral and Event Driven had the largest positive returns.
- The third reading of Q2 2019 GDP QoQ growth came in at 2.0%. The prior 3 quarterly GDP growth figures were 3.1% for Q1 2019, 2.2% for Q4 2018 and 3.4% for Q3 2018.
- The August CPI (YoY) report showed Headline inflation of 1.7%, down from 1.8% in the prior report. Core CPI remains rose to 2.4% versus 2.2% from the prior report. On a MoM basis, Headline inflation was 0.1% and Core inflation was 0.3%.
- The most recent ISM manufacturing index reading was lower than the revised measure for July at 49.1, failing to meet expectations. The ISM non-manufacturing index rose from the prior month to 56.4 and beat estimates.
- In housing, New Home Sales and Housing Starts were up sharply for the month as were Building Permits and Existing Home Sales.
- The Unemployment Rate stayed at 3.7%. The change in Non-Farm Payrolls came in below 200,00 at 130,000, missing expectations.
- The Conference Board Consumer Confidence indicator dropped sharply to 125.1 defying expectations of 133.
- The U.S. Federal Reserve met on Sept 18 and cut the Fed Funds rate by 0.25% to a range of 1.75% to 2.00%. The next Fed meeting is October 30th and the markets are expecting another 0.25% rate cut.
- The ECB further cut the interest rate om the deposit facility by -0.10% to -0.50% signaling a willingness to continue providing monetary stimulus through rate-cuts and asset purchases.
When Bad News is Good News
Weakening economic data has been met with higher stock prices as investors’ thirst for ever lower rates helped to buoy the markets. Despite Tariffs, trade wars and tweets all led to decreased growth expectations. Despite a downward trend in corporate earnings, stock prices continued to climb in September, leading to higher valuation multiples.
The bond market yield curve remains flat with the 10-year Treasury yield (1.68%) slightly above the 2-year rate of 1.62%. The short end of the curve (1-3 months) was a little higher at 1.75%-2%. 2% while the long end of the curve (30+ years) was in the 1.7% range. The range of yields remains very tight.
Credit spreads widened out. Combined with longer term rates rising modestly, there was pressure on investment grade corporate bonds.
Employment remains strong and the unemployment rate continues to remain near historically low levels. Wages have been improving although it appears that the economic headlines might be taking a toll on consumer psyche as the consumer confidence index took a hit. Still, the consumer has remained resilient thus far with retail sales and durable goods orders rising. Despite a strong capacity utilization reading and rising industrial production, slowing GDP and falling ISM could point to a more problematic economic outlook.
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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 MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.
The MSCI Emerging Markets (EM) Index captures large and mid-cap representation across 24 emerging markets countries.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and nonagency). Bloomberg Barclays US Universal Index includes high yield.
The Bloomberg Barclays U.S. Short-Term Treasury Bond Index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of between 1 and 12 months.
Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes. Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile. Soft inflation typically describes attempts by central banks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a significant increase in unemployment, or a hard landing.
iBoxx Liquid Investment Grade Index is designed to provide a balanced representation of the USD investment grade corporate market and to meet the investors demand for a USD denominated, highly liquid and representative investment grade corporate index.
iBoxx Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe.
ICE BoAML US Treasury 20 year+ Index ICE U.S. Treasury Indices are market value weighted and designed to measure the performance of the U.S. dollar-denominated, fixed rate U.S. Treasury market.
The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.
The Purchasing Managers Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A PMI of more than 50 represents expansion of the manufacturing sector, compared to the previous month. A reading under 50 represents a contraction, while a reading at 50 indicates no change.
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.
U.S. Treasuries 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 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.
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