Commentaries

PMC Weekly Review - December 2, 2016

A Macro View – November Monthly Recap

Domestic equity markets surged in November, as investors anticipated an injection of economic growth with the election of Donald Trump. Markets had been volatile leading up to the election, amid uncertainty about the outcome of the race. Prior to the election, many market analysts had speculated that if Trump won, the equity markets would drop, as his election would represent a change in the status quo. Investors also gained greater clarity on the likelihood that the Federal Open Market Committee (FOMC) would raise the fed funds rate at its upcoming December meeting. The employment situation continued to be a positive, as employers added 178,000 jobs. The consensus among economists and analysts is that the FOMC will move to raise rates at its meeting in two weeks, an outcome also anticipated by the futures market, which is currently implying a 100% probability of a rate hike.

Within this context, broad market indices were mostly higher during the month. The S&P 500 gained +3.7%, and is now up +9.8% year-to-date. The Dow Jones Industrial Average (DJIA) also advanced, delivering a gain of +5.9%. The tech-heavy Nasdaq Composite Index rose by +2.8%, and is now up +7.6% so far year-to-date. The Russell 2000 Index of small cap stocks far outperformed the Russell 1000 Index of large cap stocks. Value stocks outperformed growth stocks, and have outperformed by more than 900 basis points year-to-date. In terms of sectors, the top performers in the month were Financials, Industrials, and Energy, with returns of +13.9%, +8.9%, and +8.4%, respectively. Utilities, Consumer Staples, and Information Technology were the poorest performers, with returns of -5.4%, -4.3%, and -0.3%, respectively. Commodities were higher, posting a gain of +1.3%. REITs declined -1.4% in sympathy with the rise in interest rates.

International equity markets, unlike domestic markets, were generally lower in November. Most regions, in both developed economies and emerging markets, had a difficult time. Some of the underperformance can be attributed to investor reaction to what they perceive will be Trump’s “America first” trade policies. The MSCI World ex-U.S. Index declined by -1.6% for the month, and is now down -0.5% year-to-date through November. Emerging markets performed poorly, largely as a result of the potential for detrimental US trade policies, as well as the rise in interest rates. The MSCI Emerging Markets Index posted a loss of -4.6% for the month, and is now up +10.9% for the year to date. The MSCI EAFE Index, which measures developed markets performance, declined -2.0%. Regionally, Eastern Europe and the Pacific region ex-Japan were the best relative performers, with returns of +1.2% and -0.1%, respectively. Latin America and Asia were the poorest relative performers, with declines of -10.6% and -3.3%, respectively.

Fixed income markets suffered steep declines in November, as investors concluded that the FOMC would raise rates in December. In addition, some of the losses may be attributed to investors beginning to rotate assets out of bonds and into equities. The November employment report should provide support for an interest rate hike by the FOMC this month. The yield curve steepened substantially, as yields on intermediate- and long-term maturities rose more than those on short-term maturities. Within this environment, the yield on the 10-year U.S. Treasury note ended the month at 2.38%, up 55 basis points from the 1.83% level of October 31. Performance of broad-based fixed income indices suffered in November, with the Barclays U.S. Aggregate Bond Index declining -2.4% for the month. Global fixed income markets performed worse, with the Barclays Global Aggregate ex-U.S. Index dropping -5.3%. Intermediate-term corporate bonds also fell, as the Barclays U.S. Corporate 5-10 Year Index declined by -2.9%. The Barclays U.S. Corporate High Yield Index eased by -0.5%. Municipals performed poorly, declining by -3.7% for November.

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