Please find the next blog in our monthly series that provides a review of the prior month’s market data, the state of the economy, and the global financial markets.
Global Economy:
The US and Euro-area economies both soared to record GDP growth in the 3rd quarter following the previous quarter’s record declines. More recent indicators paint a gloomier picture as the coronavirus continues to surge, threatening additional lockdowns. Fed policy is likely to remain accommodative for the foreseeable future, but any new fiscal support has been delayed until after the election. Controlling the virus will ultimately be the key to sustained economic momentum. While the most optimistic estimates of a Covid-19 vaccine by the election have already proven unrealistic, experts are still confident a vaccine will be produced, though the timing and effectiveness remain uncertain. Many potential outcomes for the size and speed of recovery remain.
The Federal Open Market Committee did not officially meet in October. Perhaps in a sign of the limited monetary policy tools remaining, Fed officials continue to push Congress to pass more fiscal stimulus. Chairman Powell’s public statements in the month urged that delaying stimulus could “lead to a weak recovery, creating unnecessary hardship for households and businesses.” After a rapid expansion, the Fed balance sheet has remained stable in recent months as strained financial conditions have eased, hovering around $7 trillion before reaching a new high in October of $7.2 trillion.
The first estimate of 3Q-20 real GDP indicated the US GDP expanded at a record rate of +33.1% annualized. This rate did not fully offset the 2nd quarter’s record decline. The expansion reflected continued efforts to reopen, leading to increases in several segments of the economy including personal consumption, private inventory investment, exports, nonresidential fixed investment, and residential fixed investment. These were partly offset by a decrease in government spending. Analysts expect growth to moderate in 4Q-20, with estimates ranging from +2.0% to +6.0% annualized.
More than 66 million US workers have filed initial unemployment claims since mid-March. Weekly initial claims continued to trend downward in October but remain elevated. There were 638,000 jobs added in the month as unemployment fell to 6.9%. Notable job gains occurred in leisure and hospitality, professional and business services, retail trade, and construction. Employment in government declined. Core CPI was flat at +1.7% year-over-year, while the FOMC’s preferred measure, Core PCE, increased to +1.6% year-over-year through September.
Global Markets:
Returns for most major equity indices were negative in October. Market sentiment faded in the month as coronavirus cases surged and additional fiscal stimulus failed to materialize. The S&P 500, which represents large US-based entities, declined for the second month in a row with a -2.7% return. Utilities (+5.0%) and Communication Services (+0.5%) were the only positive performing sectors in the month while Information Technology (-5.2%) and Energy (-4.7%) had the largest declines among sectors. Small cap stocks, as represented by the Russell 2000, outperformed large caps with a +2.1% return. Financials (+9.3%), Materials (+6.0%), and Utilities (+5.0%) were the top performers while Communication Services (-3.6%) and Real Estate (-3.2%) lagged. Value outperformed Growth across the market capitalization spectrum.
In the broad international developed markets, the MSCI EAFE index fell -4.0%. The decline was broad-based, with most sectors and countries negative for the month. Communication Services (+0.4%) was the only positive performing sector while Health Care (-7.5%) and Energy (-7.0%) were the laggards. Among developed countries, New Zealand (+0.5%) and Australia (+0.0%) were the only positive performers during the month. Finland (-7.6%) and Norway (-7.1%) had the lowest developed market performance with most countries down -2% to -5%.
Emerging market stocks, as represented by the MSCI Emerging Markets index, outperformed their developed market counterparts at +2.1%. Monthly performance was top-heavy as only a handful of countries posted positive returns. At 43% of the index China’s positive month (+5.3%) provided most of the rally.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was negative for the month but performed in-line with most equities, returning -3.3%. The energy related Alerian MLP outperformed other equities at +4.4%. The near-month NYMEX oil declined in October (-11.0%) and remains off by -41.4% year-to-date. Gold had a second straight negative month, falling 0.4%. However, the diversified Bloomberg Commodity index was up +1.4% amid mixed performance by index sub-components.
US Treasury yields increased across the curve in October, with the 10-year rate rising 19 bps month-over-month, the highest level since early June. The treasury curve steepened in the month, with the 10-year to 2-year difference reaching its steepest point since March 2018. Given this backdrop, the overall UST complex was down for the month at -0.9%, although year-to-date returns remain impressive at +7.9%. Sovereign yields outside of the US were mixed, and the global stock of negative yielding debt increased to $16.5 trillion from $15.5 trillion.
The BloomBar US Aggregate Bond index outperformed risk-free US Treasuries on both an absolute and duration-matched basis as credit spreads closed the month slightly tighter. While the benchmark lost -0.5% in October, the 12-month performance of +6.2% remains impressive given prevailing yield levels. IG corporate issuance was less than half of last month’s record total and investor demand remained strong. With slightly tighter spreads across most categories and higher UST yields, the benchmark’s yield-to-worst rose 6 bps to just 1.24%.
The BloomBar 1-15-Year Municipal index outperformed US Treasuries, returning -0.3% in October. Issuance remained exceptionally high in the month as municipalities rushed to issue ahead of the election and associated uncertainty, but demand continued to be steady. The increase in Treasury yields helped push Muni/Treasury ratios down in the month across longer portions of the curve. Investors will look for clarity around additional stimulus and potential tax law changes as final votes are tallied around the US.
The BloomBar US Corporate High Yield index returned +0.5% for October, directionally consistent with small cap equities. Benchmark spreads were 8 bps tighter on average amid heavy supply and robust demand. All-in yields were roughly flat in the month and are now at 5.78%. Default volume has tapered but is forecast to close the year higher. Bank loans continued to recover while emerging market debt also had positive returns in the month.
Disclaimers:
The views expressed herein are those of Asset Consulting Group (ACG). They are subject to change at any time. This report was prepared by ACG for you at your request. Although the information presented herein has been obtained from and is based upon sources ACG believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. Accordingly, ACG does not itself endorse or guarantee, and does not itself assume liability whatsoever for, the accuracy or reliability of any third party data or the financial information contained herein. Certain information herein constitutes forward-looking statements, which can be identified by the use of terms such as “may”, “will”, “expect”, “anticipate”, “project”, “estimate”, or any variations thereof. As a result of various uncertainties and actual events, including those discussed herein, actual results or performance of a particular investment strategy may differ materially from those reflected or contemplated in such forward-looking statements. As a result, you should not rely on such forward-looking statements in making investment decisions. ACG has no duty to update or amend such forward-looking statements. The information presented herein is for informational purposes only and is not intended as an offer to sell or the solicitation of an offer to purchase a security.
Please be aware that there are inherent limitations to all financial models, including Monte Carlo Simulations. Monte Carlo Simulations are a tool used to analyze a range of possible outcomes and assist in making educated asset allocation decisions. Monte Carlo Simulations cannot predict the future or eliminate investment risk. The output of the Monte Carlo Simulation is based on ACG’s capital market assumptions that are derived from proprietary models based upon well-recognized financial principles and reasonable estimates about relevant future market conditions. Capital market assumptions based on other models or different estimates may yield different results. ACG expressly disclaims any responsibility for (i) the accuracy of the simulated probability distributions or the assumptions used in deriving the probability distributions, (ii) any errors or omissions in computing or disseminating the probability distributions and (iii) and any reliance on or uses to which the probability distributions are put. The projections or other information generated by ACG regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results and are not guarantees of future results. Judgments and approximations are a necessary and integral part of constructing projected returns. Any estimate of what could have been an investment strategy’s performance is likely to differ from what the strategy would actually have yielded had it been in existence during the relevant period. The source and use of data and the arithmetic operations used for calculating projected returns may be incorrect, inappropriate, flawed or otherwise deficient.
Past performance is not indicative of future results. Given the inherent volatility of the securities markets, you should not assume that your investments will experience returns comparable to those shown in the analysis contained in this report. For example, market and economic conditions may change in the future producing materially different results than those shown included in the analysis contained in this report. Any comparison to an index is for comparative purposes only. An investment cannot be made directly into an index. Indices are unmanaged and do not reflect the deduction of advisory fees. This report is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. No assurance can be given that the investment objectives described herein will be achieved and investment results may vary substantially on a quarterly, annual or other periodic basis. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.
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 an Investment Adviser.