Monthly Market Update for September 2015

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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.

Global Economy:

The pace of growth in the US economy cooled in September as the rising US dollar constrained business activity and lowered the cost competitiveness of US exporters.  The US economy added fewer jobs than projected in September, while wage growth was stagnate and the unemployment rate was unchanged.  Job growth was 142,000 versus forecasted growth of 200,000.  This followed a downward revision for August to 136,000 from the original estimate of 173,000.  The unemployment rate was unchanged at 5.1%, while the underemployment rate, that includes part time workers looking for full time work, dropped to 10.0%, from 10.3%.  Average hourly wages increased 2.2% over the past 12 months.

The underlying strength in the US dollar and lackluster foreign demand continues to impact the US factory sector.  The Institute for Supply Management’s (ISM) manufacturing index declined to 50.2 in September from 51.1 in August as forward looking indicators were generally weak.  The new orders index declined to 50.1 from 51.7, while the production index fell sharply to 51.8 from 53.6.  The ISM’s gauge of the service sectors dropped to 56.9 from 59.0 in August.

The US government’s third estimate of second quarter growth was revised moderately higher to an annualized 3.9%, from 3.7%, as previously reported.  The upward revision came mostly from acceleration in consumer and state and local government spending but was partially offset by a decrease in inventory investment.  The latest reading on US inflation showed the continuing impact of falling energy costs as the August CPI fell 0.1%, the first decrease since January.  On a year over year basis, CPI increased a meager 0.2% in August.  The core CPI, which strips out energy and fuel costs, rose 1.8% over the last year.

Uncertainty regarding the global economy prompted the Federal Reserve (Fed) to hold rates near zero at its September meeting.  Additionally, the Fed lowered forecasts for the 2015 year end Fed funds rate to 0.4% from 1.1% projected in December 2014.

Global Markets:

Fears regarding China’s future economic growth prospects and continued uncertainty about the path of US interest rates led to a weak showing by US equities in September.  For the month, the S&P 500 declined 2.5%, as eight of the ten sectors declined.   Material and energy stocks were the worst performers, declining 7.6% and 6.8%, respectively.  For the year, energy shares have fallen 23%.  Decliners outpaced advancers by a wide margin for the second consecutive month at 355 to 145.  The final reading on corporate profits for the second quarter of 2015 showed a loss of 1.7% on a share-weighted basis, but a gain of 5.0% when subtracting the energy sector.  Energy stocks plunged 56%, hurt by the decline in oil prices.  The benchmark of small cap stocks, Russell 2000, fell 4.9%, adding to a loss of 7.7% for the year.

Global equities declined as worries regarding sluggish global growth caused investors to shy away from riskier assets.  Euro zone equities registered negative returns despite positive economic data showing the region’s GDP rose 0.4% in the second quarter due to an increase in consumer and government spending.  The Stoxx 600 index of European stocks lost 4.0% (-4.2% USD) for September.  Weaker than forecast economic data pressured Japanese stocks lower as the Nikkei 225 index plunged 7.5% (-6.2% USD).  Japan’s economy shrank 1.2% in the second quarter, following a rise of 4.5% during the first quarter.

Emerging markets posted sharp declines in September hurt by continued declines in Chinese equities and further commodity price weakness.  The MSCI Emerging Market index declined 3.0% (USD) with Latin America the worst performing region.  Weak oil prices and currency declines have had a negative impact on these stocks.  Chinese equities fell for the fourth consecutive month as the Shanghai Composite lost 4.7% (-4.3% USD).

Commodities continue to be hurt by a strong US dollar.  The Bloomberg Commodity index declined 3.4% in September due to an 8.4% drop in oil prices.  Gold prices fell 1.5% in September.

September was broadly positive for global sovereign bonds as investors sought out safe haven assets amid the global downturn in equities.  The Fed’s announcement that it was keeping interest rates on hold helped US Treasury prices rally and US Treasury yields fell across the yield curve.  Intermediate Treasury yields declined the most as the five-year Treasury dropped 19 basis points (bps) to 1.36%, while 10-year Treasury rates rose to as high as 2.30% before closing the month at 2.04%, 18 bps lower.  In US corporate bond markets, investment grade corporate bond yields declined to 3.42% from 3.49% at the start of the month, resulting in a 0.75% monthly return for the Barclays IG Corporate index.  However, US high yield bonds suffered losses as yields rose to 8.04% from 7.26%, the fifth consecutive monthly rise, as the Barclays US High Yield index slipped 2.6%.

The euro region’s inflation rate unexpectedly turned negative in September according to preliminary government data, a consequence of cheaper energy prices.  Consumer prices in the region fell 0.1% from a year earlier, driven by an 8.9% decline in energy.  Core inflation, which removes food and energy, remained unchanged at 0.9%.  Following the report, the European Central Bank signaled that they could expand quantitative easing to avert deflation.  In Spain, consumer prices fell 1.2% from a year earlier, helping push 10-year Spanish yields to the lowest level in four months.  The extra yield between Spanish 10-year yields and German debt rose as high as 147 bps by mid-September, before narrowing to 131 bps by months close.  German 10-year yields fell to 0.59% from 0.80% at the end of August.

Uncertainty regarding the timing of the first Federal Reserve rate increase since 2006 weighed on the performance of emerging market debt as spreads over US Treasuries rose to the highest level since 2011.  Spreads on the JPMorgan EMBI Global index of US dollar debt rose to 483 bps on September 29, the highest since October of 2011, before closing the month at 474 bps.  As a result, performance of the index fell 1.4% for the month.

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. HighTower/GFP 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. Securities are offered through HighTower Securities, LLC, member FINRA/SIPC/MSRB. HighTower Advisors, LLC is a SEC registered investment adviser.

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