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.
Shaking off continued geopolitical uncertainty, investors provided a renewed bid for risk assets in September. Accordingly, global equities advanced modestly while interest rates reversed a portion of the prior month’s sharp decline. Manufacturing data continued to show signs of slowing and there was even some moderation in consumer spending and sentiment. US-China trade talks are scheduled to officially resume in mid-October, while the British Prime Minister faces political and legal challenges in the bid to complete Brexit negotiations by the October 31st deadline. An impeachment inquiry has taken center stage in the US in light of the President’s recent call with Ukrainian leadership.
The Federal Open Market Committee (FOMC) met in mid-September and, as widely expected, reduced the Federal Funds rate by 25 bps to a targeted range of 1.75% to 2.00%. The Committee’s latest projections suggest the “mid-cycle adjustment” may be complete, even as the futures market is pricing in at least two more cuts over the next 12 months. Chairman Powell continues to emphasize a willingness by the FOMC to act as appropriate when economic conditions warrant it. Amid some dissent, the European Central Bank’s (ECB) outgoing President Mario Draghi responded in mid-September, with a rate cut, a renewed asset purchase program, and calls for fiscal stimulus.
The third estimate of 2Q-19 real GDP reported growth at an annualized rate of 2.0%, the same as the second estimate. A slight downward revision for consumer spending to 4.6% growth was offset by upward revisions to government spending and net exports. Consensus GDP expectations for 3Q-19 have risen slightly, recently residing between 1.5% and 2.0%.
Slightly below expectations, 136,000 new jobs were added in September. The unemployment rate unexpectedly declined to 3.5%, the lowest level since December 1969. Labor participation held steady at 63.2%, while average hourly wages advanced at a year-over-year pace of 2.9%, the lowest year-over-year increase since July 2018. The Core CPI index trended slightly higher to 2.4% year-over-year, while the FOMC’s preferred measure, the Core PCE index, increased to 1.8% year-over-year through August and remains below the “symmetrical” 2.0% target.
Returns were up solidly across most risk assets in September, with international stocks slightly outperforming domestic counterparts. The S&P 500, which represents large US-based entities, reversed its August decline by appreciating +1.9% for the month and is back up over 20% for the year. Strength was generally broad based, with Financials (+4.5%), Utilities (+4.0%), and Energy (+3.6%) leading the way. Health Care (-0.3%) showed some weakness and was the only sector to decline. Small cap stocks, as represented by the Russell 2000, outperformed large stocks by 20 bps at +2.1%. Value (+5.1%) outperformed Growth (-0.8%) by nearly 600 bps but still trails by 250 bps year-to-date.
In the broad international developed markets, the MSCI EAFE index was up strongly at +2.9%, even as ongoing strength in the US dollar weighs on returns for US-based investors. Sector returns roughly followed the pattern witnessed in the S&P 500, and at the country level Japan was a slight upside outlier at +4.2% as their “safe haven” currency continued to appreciate. Pacific ex-Japan was the relative laggard, with Hong Kong tipping negative.
Emerging market stocks, as represented by the MSCI Emerging Markets index, were up moderately at +1.9%, but the category is still significantly underperforming other major equity indexes for the year at +6.2%. Performance was positive across all major regions for the month. Year-to-date, strength has been shown by Taiwan (+16.7%) and Brazil (+10.8%) in particular, with China (+7.8%) doing moderately. India (+2.2%) and South Korea (-0.6%) have struggled.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was up solidly at +2.5% during the month, and is up an impressive +20.7% for the year. The Alerian MLP index was up slightly at 0.7%, further securing it double-digit return profile for 2019. The near-month NYMEX oil contract advanced nearly 15% following an attack on Saudi infrastructure before finishing down -1.9% for the month. Gold retreated -3.8% from recent highs as investors embraced risk-seeking assets. The broadly diversified Bloomberg Commodity index was up +1.2% for the month.
US Treasury (UST) yields increased rapidly during the first half of September, before softening somewhat by month-end as geopolitical uncertainty and global growth concerns captured the spotlight. With policy easing by the FOMC, the yield curve steepened modestly as longer-term rates sold off slightly more than short-end rates. In this environment, the high-quality government bond complex returned -0.9% overall. The commonly referenced 10-year UST yield traded as much as 45 bps higher intra-month before settling at 1.67%. While the global stock of negative yielding debt contracted by more than $2 trillion as rates moved higher, demand for US assets remains robust given the relative yield advantage.
The BloomBar US Aggregate Bond index outperformed risk-free US Treasuries on both an absolute and duration-matched basis. Despite suffering a loss of -0.5% in September, year-to-date performance of +8.5% remains quite remarkable given prevailing yield levels. Spreads for IG corporates were 5 bps tighter for the month, with BBB-rated issues leading in a more risk-on environment. The benchmark’s yield-to-worst moved 13 bps higher, and now resides just above 2.25%.
The BloomBar 1-15-Year Municipal index returned -0.8% in September, taking year-to-date performance to +5.6%. Even as sustained inflows continue to benefit the category, an uptick in new issue municipal supply weighed on the category. As such, the 10-year municipal/UST ratio of ~88% has edged closer to fair value following historic richness this past May.
Despite continued weakness in the less liquid CCC-rated sleeve, the BloomBar US Corporate High Yield index advanced +0.4% for the month and has now delivered +11.4% year-to-date. Benchmark spreads tightened back 20 bps, and all-in yields have fallen to just under 5.7%. Global yield movements were directionally consistent with US government bonds, but ongoing US dollar strength caused unhedged international bonds to lag. Emerging market bonds provided mixed results, as local currency issues outperformed despite tighter spreads for US dollar-based sovereign and corporate credits.
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 an Investment Adviser.