Let’s Call It What It Was…
- Equity markets dropped sharply in October, however, a late-month rebound helped curb those losses and the three major U.S. equity indices remained in positive territory year-to-date.
- Yields continued to rise in October, which put further pressure on bond returns. While high-yield bonds struggled for the month, they remained one of the few pockets within fixed income to have positive year-to-date results.
- U.S. economic data in October continued to show ongoing growth in the U.S. economy, although data was a bit more mixed.
- Despite the capital market volatility in October, we believe that fundamentals continue to reflect a solid economic backdrop.
Let’s call it what it was – one of the worst months for U.S. equity markets in years. Pre-election jitters and ongoing concerns about a trade war with China were among the factors that spurred capital market volatility and weakness during the month. For the second time this year, the S&P 500 Index entered into “correction” territory defined as drop of 10% or more from its prior high. (The S&P 500 hit the 10% correction mark on an intraday basis in October.) The Russell 2000 Index and the NASDAQ Composite experienced even sharper declines during the month.
The numbers played out as follows for October: The S&P 500 dropped -6.84%, the Dow Jones Industrial Average fell -4.98%, the NASDAQ Composite slumped -9.16%, and the Russell 2000 Index declined -10.86%. Growth stocks suffered more than value, as the Russell 1000 Growth Index fell -8.94% compared to the decline of the Russell 1000 Value Index of -5.18%. However, growth stocks still enjoyed a clear advantage over value on a year-to-date basis.
Mid cap and small cap stocks struggled more than their large-cap counterparts in October and U.S. equity indices were down across the board for the month. Despite these sharp declines in October, through ten months of 2018, the S&P 500, the Dow Jones Industrial Average and the NASDAQ Composite still enjoyed positive returns year to date. Declines in October pushed small-cap stocks, as measured by the Russell 2000 Index, into slightly negative year-to-date territory.
International equities struggled equally in October. Losses for the month exacerbated already weak results through the first three quarters of 2018. Despite the announcement in late September of the trade agreement between the U.S., Mexico, and Canada (in essence a NAFTA replacement), trade issues with China continue to exist, which weighed on international markets.
Emerging markets continued to experience the brunt of the declines amid dollar strength and rising rates in the U.S. during October. Overall, developed international equities declined in October as the MSCI ACWI ex USA Index, a broad measure of international equities, fell -8.13% and the MSCI Emerging Markets Index declined -8.78%. On a year-to-date basis, those indices are off -10.97% and -17.48%, respectively, in what has been a very difficult year for international equities after strong gains in 2017.
FIXED INCOME MARKETS
The yield on the 10-year U.S. Treasury rose 10 basis points during the month from 3.05% to 3.15%. As would be expected during a month when rates rose, most fixed income sectors declined in October. High-yield bonds had been one pocket of strength during 2018 in fixed income, but these bonds had some of the sharpest declines during the month. While the front end of the U.S. Treasury market showed some modest gains for the month, the long end of the U.S. Treasury market showed some of the sharpest declines as rates increased.
Overall, the Bloomberg Barclays U.S. Aggregate Bond Index fell -0.79% and the Bloomberg Barclays U.S. Credit Index fell -1.40%, which pushed those indices further into negative territory on a year-to-date basis. TIPS and muni bonds fell as well during October.
The Bloomberg Barclays U.S. Aggregate Corporate High Yield Index declined -1.60% in October. Despite those declines, high yield bonds have been the best performing fixed income asset class in 2018 with a gain of 0.93% through the first ten months of the year. On a year-to-date basis, investors continue to be rewarded for taking on credit exposure during this ongoing economic expansion in-line with our position, which favors credit over pure interest rate exposure in this current market environment.
Economic data released in October was somewhat mixed, but it continued to show solid U.S. economic growth. The latest reading of the Institute for Supply Management (ISM) manufacturing index in September remained elevated at 59.8, but it was modestly below expectations and fell short of the prior month’s mark. However, the ISM non-manufacturing index, which represents the much larger service industries in the U.S. economy, came in at 61.6 exceeding expectations and surging past its level from August. Recall that ISM readings above 50 indicate expansion.
Non-farm payroll additions were disappointing at 134,000 in September, when 185,000 job gains were expected. However, that was buffeted by a strong revision to the August’s job additions and an unexpected drop in the unemployment rate to 3.7% in September. (Employment data released in early November showed a strong increase in payroll gains in October at 250,000 with revised additional gains in August offset by fewer jobs than previously reported for September.)
The Conference Board’s leading economic indicators index (the Leading Index) continued to advance as it rose as expected by 0.5% in September. Retail sales (excluding autos and gas) were flat in September when an increase of 0.3% was anticipated. On a final positive note, the first (advanced) reading of Q3 2018 GDP growth was stronger than expected at a 3.5% annualized pace compared to expectations of 3.3%. This follows Q2 2018 GDP growth of 4.2%, the strongest GDP reading since 2014.
The Federal Open Market Committee did not meet in October, but it will have two more meetings in the final months of 2018. Markets will not only watch the actions of the Fed closely in these final two meetings of the year, but will also watch for any hints of the potential pace of additional rate hikes in 2019. The Fed has come under scrutiny by the President and some market commentators of late, so as an independent body, it will be interesting to see how the central bank acts in the months ahead. We continue to expect an ongoing and measured rate-hike cycle.
|ISM Non-Manf. Composite||Sept||58||61.6||58.5||—|
|Change in Nonfarm Payrolls||Sept||185k||134k||201k||270k|
|Average Hourly Earnings YoY||Sept||2.80%||2.80%||2.90%||3.00%|
|JOLTS Job Openings||Aug||6900k||7136k||6939k||7077k|
|PPI Final Demand MoM||Sept||0.20%||0.20%||-0.10%||—|
|PPI Final Demand YoY||Sept||2.70%||2.60%||2.80%||—|
|PPI Ex Food and Energy MoM||Sept||0.20%||0.20%||-0.10%||—|
|PPI Ex Food and Energy YoY||Sept||2.50%||2.50%||2.30%||—|
|CPI Ex Food and Energy MoM||Sept||0.20%||0.10%||0.10%||—|
|CPI Ex Food and Energy YoY||Sept||2.30%||2.20%||2.20%||—|
|Retail Sales Ex Auto and Gas||Sept||0.30%||0.00%||0.20%||0.10%|
|Industrial Production MoM||Sept||0.20%||0.30%||0.40%||—|
|New Home Sales||Sept||625k||553k||629k||585k|
|Existing Home Sales||Sept||5.29m||5.15m||5.34m||5.33m|
|Durable Goods Orders||Sept P||-1.50%||0.80%||4.40%||4.60%|
|GDP Annualized QoQ||3Q A||3.30%||3.50%||4.20%||—|
|U. of Mich. Sentiment||Oct F||99||98.6||99||—|
|S&P CoreLogic CS 20-City YoY NSA||Aug||5.80%||5.49%||5.92%||5.90%|
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