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.
November was a back-and-forth month for global financial assets. While sentiment began the month relatively strong, on the heels of supportive domestic economic data and a US mid-term election that met expectations, concerns about future profit growth were building. Trade tensions between the US and China persisted, Brexit negotiations generated further animosity, and Italy continued its budget challenges with the EU.
The Federal Open Market Committee (FOMC) met in November, leaving rates unchanged and delivering an uneventful statement suggesting gradual hikes remain appropriate given underlying strength in the economy. With asset prices showing signs of stress mid-month, however, calls for a pause in the tightening cycle intensified. The perceived “dovish” reversal in a speech by Chairman Powell ultimately led investors to re-engage in risk assets at the end of the month.
The second release of 3Q-18 GDP remained at an annualized rate of 3.5%. Subsequent reports on overall spending have beaten consensus, so 4Q-18 appears to be off to a solid start. Expectations are generally in the mid-2% range for 2019 as policy stimulus wanes.
The unemployment rate remained at 3.7% in November. While the addition of 155,000 new jobs fell short of expectations, the streak of job gains has now reached 98 consecutive months. Average hourly wages continue to rise at a healthy pace, with another reported year-over-year increase of 3.1%. That said, inflation reports and market expectations lack upward momentum, with the FOMC’s preferred measure, the Core PCE index, dropping from 2.0% to 1.8%.
Global economic reports identified potential vulnerabilities abroad. At 6.5%, China’s GDP for 3Q-18 slowed to its lowest level since 2009, and manufacturing PMIs suggest no current growth. European PMI figures also fell short of expectations. Disappointing growth figures may impact European Central Bank (ECB) decisions regarding policy normalization.
Recovering from October’s dramatic fall, global stock benchmarks generally ended in positive territory for November. The S&P 500, which represents large US-based entities, was up +2.0% and is now up +5.1% fthrough end of November. Healthcare was the sector leader at +6.8%, along with Real Estate +5.3%. Energy stocks -2.2% dragged down by the declining price of oil, and IT -2.1%, were the notable sector laggards. Small cap stocks had a decent reversal from the prior month, up +1.6% and returning to positive territory for the year.
In the broad international developed markets, the MSCI EAFE index was down slightly at -0.1% in November. The trend of US dollar appreciation versus the major currencies stalled somewhat with the FOMC’s more dovish leanings.
Emerging market stocks, as represented by the MSCI Emerging Markets index, led the way in November, posting solid returns of 4.1%. For the year, the index is still down double digits, at -12.0%. The escalation of trade frictions remains a key risk for this segment of the market, however, it’s notable that local currencies were able to stage a modest recovery versus the US dollar for the month.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was up +3.8% during the month, effectively reversing October’s decline. Lower US interest rates helped to ease competition for income-focused capital. The Alerian MLP index had a slightly negative month, declining -0.8% in November, with performance at least partially affected by the significant drop in oil. The near-month NYMEX contract was down -22.0% as global supply increased and because of a lack of direction among OPEC and other major producers. The more broadly diversified Bloomberg Commodity index was slightly negative -0.6% in November, with gold again being slightly positive +0.4%.
Even as a flight to quality has yet to fully materialize, US Treasury (UST) yields fell modestly in November, and the government bond complex returned +0.9%. The environment for high-quality fixed income was initially quite dire, as rates moved to multi-year highs and the futures market was pricing at least three more policy adjustments by the end of 2019. Market volatility ultimately drove investors to reassess the Fed’s path of rate hikes, beyond the widely-expected 25 bps bump assumed to come with the December 19th statement. The commonly referenced 10-year UST yield ultimately ended 16 bps lower to finish at 2.99%.
Total returns for the Bloombar US Aggregate Bond index were up +0.6% during November, with YTD results now -1.8%. Spreads for investment-grade corporates widened by another 19 bps, with multiple issuer-specific headlines and heavy month-end supply causing credit to be the worst performing sub-sector. The traditional benchmark maintained its all-in yield above 3.5% as wider spreads essentially offset the decline in underlying base-rates.
The Bloombar 1-15-Year Municipal index returned +1.0%, as tax-exempt issues again outperformed taxable counterparts. High quality bonds outperformed riskier credits in November, even as lower-rated securities maintain an edge YTD. Municipal funds have had 10 straight weeks of outflows, which ultimately helps to restore value opportunities.
The Bloombar US Corporate High Yield index declined another -0.9% in November and is now essentially flat for 2018. Overall benchmark spreads widened by 46 bps, with riskier CCC-rated credits off by more than 115 bps. Global yield moves were directionally consistent with US government bonds, such that unhedged international bonds were positive. Local currency emerging market debt recovered +2.8% for the month, even as wider spreads hurt US dollar-based issues
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.