October 3, 2018

Data Source: Bloomberg


  • Global equity markets continue to advance, this time led by international stocks, as investors opportunistically bought overseas markets on signs of easing global trade tensions and cheaper equity market valuations. 
  • The S&P 500 Index also advanced to new highs although U.S. mid and small cap stocks lagged the broader markets.  International small caps also underperformed large caps.
  • U.S. ‘value’ and ‘dividend’ style factors underperformed as the former suffered from the underperformance of the financial sector (notably bank stocks) despite higher interest rates, which normally help bank profitability. 
  • Dividend stocks and REITs came under pressure as the 10-year Treasury yield rose to as high as 3.10% before settling just above 3% at quarter-end.  The rise in interest rates also pressured fixed income indices although U.S. high yield continued its outperformance as credit spreads for the riskiest borrowers continue to narrow. 
  • Commodities had a strong advance led by oil prices although oil’s strength continues to mask underlying weakness of industrial materials, precious metals, and agriculture.   
  • International developed markets (Europe, Japan) lagged the U.S. during the quarter but rallied towards the end of the quarter on improving business sentiment and thawing of trade relations with the U.S.  Loggerheads over Brexit negotiations with the U.K. and Italy budget disputes continue to weigh on the continent. 
  • Although investor sentiment appears to have bottomed for emerging markets, the region is still dealing with longer-term structural issues that could leave it more vulnerable to future shocks. 
  • The Federal Reserve hiked their benchmark rate to 2.00-2.25% at their September meeting and removed the “accommodation” term from its communique which some Fed analysts interpreted as a dovish signal that the end of the rate hike cycle may be near. 
  • One would not be unreasonable to expect the Fed to act more cautiously when raising rates to make sure that the U.S. economy, post 2008, can withstand a positive real rate environment and not roll over into recession. 
  • With the Fed feeling more confident on its rate hike projections, investors’ attention should turn towards inflation.  Core inflation (PCE Core Deflator) is just under 2% but employment cost pressures are building up. 
  • The U.S. economy continues to perform above expectations with 2Q real GDP growing at 4.1% and 3Q GDP tracking at 4.1% growth based on the 10/1/2018 Atlanta Fed GDPNow model.
  • Looking forward, U.S. markets may be subject to volatility around the mid-term elections, but corporate profitability remains robust on top of ~10% year-over-year revenue growth generated by S&P 500 companies. 
  • What could trip up the U.S. story, apart from renewed trade disputes, is the risk of ‘overreach’ – either overreach by the Fed, via aggressive rate tightening, or overreach by U.S. corporations via aggressive mergers & acquisition activity funded by increasing amounts of debt. 

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