IndexIQ October 2019 Commentary
- October was not the scary month investors had feared. Against a backdrop of optimism on a US-China trade deal, expectations of a 3rd rate cut by the Fed and the start of an earnings season that is beating expectations, the S&P 500 Index continued its winning ways returning 2.17%. U.S. small caps also posted a positive month on growth expectations, returning 2.63%.
- Global markets outperformed the U.S. with the MSCI EAFE returning 3.59% while Emerging Markets (EM) gained 4.22%. EM typically performs better when the US Dollar (USD) weakens, and we have seen some recent weakness in the USD following almost 2 very strong years.
- The U.S. yield curve steepened with Long-Term yields rising while short-term yields were flat, resulting in the 2 and 10-year yield spreads going more positive.
- The Bloomberg Barclays US Aggregate Bond Index was up 0.30% and the US Universal (US Aggregate plus High Yield) Index returned 0.32%.
- The Bloomberg Barclays US Short Term Treasury Index returned 0.24% while the ICE BoAML US Treasury 20 year+ Index returned -0.91%. The iBoxx Investment Grade Index returned 0.63% and the iBoxx High Yield Index was up 0.39%.
- Oil prices were essentially flat.
- In other commodities, Gold and Silver were up by 2.75% and 6.55% respectively. Copper rose 1.30% and Aluminum gained 3.09%.
- 6 of the 7 tracked hedge fund strategies performed positively in October. Global Macro was the only negative performing strategy. Equity Market Neutral and Event Driven (in particular, Merger Arbitrage) had the largest positive returns.
- The advanced reading of Q3 2019 GDP QoQ growth came in at 1.9%. The prior 3 quarterly GDP growth figures were 2.0% for Q2 2019, 3.1% for Q1 2019 and 2.2% for Q4 2018.
- The CPI (YoY) report showed Headline inflation of 1.7% was unchanged from the prior report. Core CPI remained at 2.4%, also unchanged from the prior report. On a MoM basis, Headline inflation was 0.0% and Core inflation was 0.1%.
- The most recent ISM manufacturing index reading was lower than the revised measure for August at 47.8 failing to meet expectations. The ISM non-manufacturing index fell from the prior month to 52.6, failing to beat estimates.
- In housing, New Home Sales and Housing Starts were up down for the month as were Building Permits and Existing Home Sales.
- The Unemployment Rate dropped to 3.5%. The change in Non-Farm Payrolls came in below 200,00 at 136,000, missing expectations.
- The Conference Board Consumer Confidence indicator dropped to 125.9.
- The U.S. Federal Reserve met on Oct 30 and cut the Fed Funds rate by 0.25% to a range of 1.5% to 1.75%. The next Fed meeting is December 11th and the markets are expecting the Fed to not change the Fed Funds rate.
October was not as frightening as feared
October has historically been a difficult month for equities. Looking back over the last 90 years, October has had the lowest average return, highest standard deviation and largest drawdown for any month. But this year was different. A combination of optimism on a US-China trade deal, expectations of a 3rd rate cut by the Fed and the start of an earnings season that is beating expectations helped buoy equity markets.
The bond market yield curve has begun to normalize flat with the 10-year Treasury yield (1.80%) above the 2-year rate of 1.62%. The range of yields remains very tight but we’re currently moving in the direction of a more normal, upward sloping yield curve. Credit spreads narrowed on the optimism that hit the equity markets.
Employment remains reasonably strong and the unemployment rate continues to remain near historically low levels. Markets have so far shrugged off talks of impeaching President Trump. Headline news has generally been met with optimism. While the economic data has not been robust (it seems to be pointing to a slowing environment), there is a chance that a US China trade deal and/or Fed accommodation could forestall a recession.
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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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