Commentaries

PMC Weekly Review - October 7, 2016

A Macro View – September Monthly Recap

Domestic equity markets edged slightly higher in September, holding their own in a seasonally disappointing month. Investors weighed several factors, including the Federal Open Market Committee’s (FOMC) decision to stand pat once again and not raise interest rates; modestly improving economic data; and the presidential election campaign. In the lead-up to its September meeting, several FOMC members had speculated that the committee would vote to raise rates. However, while there were more dissenters than in previous meetings, the committee ultimately decided to hold off until at least the next
meeting. With employment and other economic data starting to trend higher, the consensus among analysts is that the FOMC will implement a rate increase at its December meeting, barring an unforeseen dip in economic data. The futures market is also predicting a December rate hike. Today’s release of lower-than-forecast September payroll data should not alter rate-increase expectations.

Within this context, broad market indices were slightly higher during the month. The S&P 500 rose by +0.02%, and is now up +7.8% so far this year. The Dow Jones Industrials (DJIA) fell modestly, posting a loss of -0.4%. The tech-heavy Nasdaq Composite Index gained +2.0%, and had generated a +10.0% gain so far year-to-date. The Russell 2000 Index of small cap stocks outperformed the Russell 1000 Index of large cap stocks. Value stocks underperformed growth stocks during the month, and have outperformed by more than 400 basis points year-to-date. In terms of sector performance, the top performers in the month were energy, information technology, and utilities, with returns of +3.1%, +2.4%, and +0.4%,
respectively. Financials and consumer staples were the poorest performers, with returns of -2.7% and -1.5%, respectively. Commodities performed well during the month, gaining +3.1%. REITs fell -2.1% in September due to a less favorable interest rate environment.

International equity markets were generally higher in September, as most regions generated small gains. International developed markets also outperformed U.S. indices. European investors also continue to grapple with Brexit and its potential implications. The MSCI World ex-U.S. Index advanced by +1.2% for the month, and is now up +3.1% through the first nine months of the year. Emerging markets continued to recover nicely, due in part to the stabilization of commodities prices. The MSCI Emerging Markets Index posted a gain of +1.3% for the month, and is now up +16.0% on a year-to-date basis. The MSCI EAFE Index, which measures developed markets performance, climbed +1.2%. Regionally, the Pacific region ex-Japan and China were the best relative performers, advancing +2.7% and +2.5%, respectively. Latin America and Europe were the poorest relative performers, with a loss of -0.8% and a gain of +0.9%, respectively.

Fixed income markets delivered mixed performance in September, as the outlook for the interest rate environment continued to evolve. Investors considered several factors, including the FOMC’s decision to stand pat at its most recent meeting, and generally firming economic data domestically. As in previous recent months, the yield curve continued to flatten, as investors anticipate that a looming rate increase will push yields on short-term maturities higher than intermediate- and long-term maturities. The futures market is assigning a 64% probability of a rate hike at the FOMC’s December meeting. Within this environment, the yield on the 10-year U.S. Treasury note ended the month at 1.60%, up two basis points from the 1.58% level of August 31. Performance of broad-based fixed income indices was mixed in September, with the Barclays U.S. Aggregate Bond Index declining -0.06% for the month. Global fixed income markets performed better, with the Barclays Global Aggregate ex-U.S. Index climbing +1.0%. Intermediate-term corporate bonds were a bit higher, as the Barclays U.S. Corporate 5-10 Year Index inched up by +0.06%. The Barclays U.S. Corporate High Yield Index gained +0.7%. Municipals declined -0.5% for September.

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