IndexIQ November 2019 commentary

by: , Chief Investment Officer and Managing Director | IndexIQ; IndexIQ, ; ,

Markets

  • U.S. equity markets rallied in November with the early December Fed meeting and the expectation of a 3rd rate cut by the Fed providing the catalyst. U.S. small caps also posted a positive month.
  • With the 3rd quarter earnings season moving along, both sales and earnings beat market expectations. While sales growth was positive, earnings growth was negative.
  • Global markets underperformed the U.S. with the MSCI EAFE returning 1.13% while Emerging Markets lost -0.14%. EM typically performs worse when the USD strengthens and we have seen some recent strength in the USD following weakness around a possible Brexit solution in October that failed to materialize.
  • The U.S. yield curve remains very flat. On the margin, the curve steepened earlier in the month only to reverse course over the latter part of the month to remain unchanged as both Long-Term and Short-Term yields rose modestly.
  • The Bloomberg Barclays US Aggregate Bond Index was down -0.05% and the US Universal (US Aggregate Plus High Yield) Index returned -0.02%.
  • The Bloomberg Barclays US Short Term Treasury Index returned 0.11% while the ICE BoAML US Treasury 20 year+ Index returned -0.52%. The iBoxx Investment Grade Index returned 0.39% and the iBoxx High Yield Index was up 0.41%.
  • Oil prices were up almost 2% however natural gas fell by more than -13%.
  • In other commodities, Gold and Silver were up down -3.24% and -5.95% respectively. Copper rose 1.28% and Aluminum gained 2.17%.
  • 6 of the 7 tracked hedge fund strategies performed positively in November. Equity Market Neutral was the only negative performing strategy. Event Driven (in particular, Merger Arbitrage), Macro and Equity Hedge had the largest positive returns

Economic Data

  • The second reading of Q3 2019 GDP QoQ growth came in at 2.1%, beating the advanced estimate and market consensus. The prior three 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 1.8%, up 0.1% from the prior report. Core CPI dropped by -0.1% from the prior report to 2.3%. On a MoM basis, Headline inflation was 0.4% and Core inflation was 0.2%.
  • The most recent ISM manufacturing index reading was higher than the revised measure for September at 48.3 though it failed to meet expectations. The ISM non-manufacturing index rose from the prior month to 54.7, beating estimates.
  • In housing, New Home Sales were down for the month however Housing Starts, Building Permits and Existing Home Sales rose.
  • The Unemployment Rate inched up to 3.6%. The change in Non-Farm Payrolls came in at 128,000, beating expectations.
  • The Conference Board Consumer Confidence indicator dropped slightly to 125.5.

U.S. Equities continued their winning ways in November

U.S. equities were very strong in November taking the markets to all-time record highs. Enthusiasm ahead of the FOMC meeting in the beginning of December provided much of the catalyst for the surge despite weakening economic indicators and declining earnings.

The bond market yield curve remains relatively flat although it is slightly upward sloping indicating that much the pessimism in the 3rd quarter have waned, at least a little. Both the 2-year and 10-year Treasury yields moved up modestly over the month. Credit spreads widened out but not in a meaningful way.

Employment remains reasonably strong and the unemployment rate continues to remain near historically low levels. Markets have continued to shrug off talks of impeaching President Trump. Headline news has generally been met with optimism. Volatility remains as seemingly daily updates on China trade talks move the markets around.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

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.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC.

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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

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