Monthly Market Update for October
Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
October was a dismal month across the globe, with trade tensions between the US and China escalating, Brexit negotiations alternately starting and stopping, Italy’s budget causing issues with the EU, and Germany’s chancellor announcing she will not run again. US mid-term elections were also on the minds of investors.
The Federal Open Market Committee (FOMC) did not meet in October, but an off-the-cuff comment by Chairman Powell at an event on October 3rd seemed to catalyze a period of heightened market concern. Specifically, he stated “We may go past neutral. But we’re a long way from neutral at this point, probably.” Other factors certainly played a role, but concern over how high rates will go caused the S&P 500 to trade down in 15 of the subsequent 18 trading days.
The initial estimate of 3Q-18 GDP came in slightly above expectations, at an annualized rate of 3.5%. Consumer spending remains robust given elevated sentiment overall, although there was a notable deceleration in non-residential/business fixed investment. Expectations are generally in the mid-2% range for 4Q-18 and much of 2019 as policy stimulus wanes.
The unemployment rate held steady at 3.7% in October, despite employers impressively adding 250,000 new jobs. The labor force participation rate increased during the month to 62.9%, but this reading remains somewhat flat for the year. Average hourly wages continued to rise, with the year-over-year increase of 3.1% representing the fastest pace in nearly a decade. Inflation continued to moderate, with the FOMC’s preferred measure, the Core PCE index, remaining at 2.0%.
Highlighting the trend of de-synchronous global outcomes, European GDP for 3Q-18 rose at only 0.2%, the lowest level of growth in over four years. Tightening global financial conditions continue to pressure emerging markets broadly, and the region’s export-driven economies remain particularly tied to Chinese demand. Disappointing growth figures could impact European Central Bank (ECB) decisions regarding asset purchases and eventual rate hikes.
Across the equity landscape, everything was haunted by aggressive price declines in October. Global benchmarks were all in negative territory, with most major indices down over 8% for the month. The S&P 500, which represents large US-based entities, was a relative outperformer, finishing down -6.8% in October, with year-to-date (YTD) returns still remaining positive at +3.0%. Consumer Staples (+2.1%) and Utilities (+1.9%) were an exception for the month, with the rest of the major sectors down, led by Consumer Discretionary (-11.3%), Energy (-11.3%) and Industrials (-10.9%). Small cap stocks declined more significantly, with the Russell 2000 down -10.9% for the month and erasing YTD gains.
In the broad international developed markets, the MSCI EAFE index was down -8.0% in October. The US dollar strengthened further versus the major currencies, with the exception of the Yen.
Already battered emerging market stocks, as represented by the MSCI Emerging Markets index, declined significantly again, with the monthly loss of -8.7% more than doubling the previous year-to-date loss to -15.4%. The benchmark has now posted negative returns in 8 of the last 9 months, building on the struggles of escalating trade frictions and local currency weakness versus the US dollar.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was down -3.7% during the month, and higher US interest rates continue to create competition for income-focused capital. The Alerian MLP index had another negative month, declining -8.0% in October. Oil dropped meaningfully, with the NYMEX contract down -10.8% as global supply increased and tensions in the Middle East appeared to ease. Losses for the more broadly diversified Bloomberg Commodity index were relatively muted (-2.2%), due in part to a “risk-off” rally in gold (+2.0%).
Contrary to what might be expected amid an equity sell-off, US Treasury (UST) yields trended higher in October. Concern over a potential policy overshoot, and heavy deficit-driven supply, extended the challenging environment for high-quality fixed income. Although the yield curve steepened modestly, the excess compensation for extending maturities remains quite low. The overall UST complex was down -0.5% for the month, with the longer-dated maturities declining by more than -3.0%. The commonly referenced 10-year UST yield ended off its intra-month high, ultimately advancing 8 bps to finish at 3.14%. Despite heavy criticism from within the Trump Administration, market-implied probabilities indicate a greater than 70% chance that the FOMC will hike rates by another 25 bps with its December 19th statement.
Total returns for the Bloombar US Aggregate Bond index were down -0.8% during October, with YTD results now -2.4%. Consistent with the negative response in US equities, IG corporates were an underperforming sub-sector. Although new issue supply was restrained during the month, credit spreads widened by 12 bps and accentuated the rise in underlying base-rates. The traditional benchmark ended the month with an all-in yield above 3.5% for the first time since 2009.
The Bloombar 1-15-Year Municipal index returned -0.4%, as tax-exempt issues sold off alongside taxable counterparts. High quality bonds outperformed riskier credits as we finally witnessed a back-up in spreads. Retail investors unnerved by rising rates resulted in four straight weeks of mutual fund outflows, but this ultimately helps to restore value opportunities.
The Bloombar US Corporate High Yield index declined -1.6% in October, surrendering the majority of its YTD gains. The benchmark’s overall spread widened by 56 bps, with riskier CCC-rated credits off by more than 100 bps. Even as global yields were better behaved, unhedged international government bonds were negative given US dollar strength. Emerging market debt provided poor outcomes for the month, with all sub-sets of the category declining by roughly 2%.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.