The U.S. economy appears to be gathering momentum, with two consecutive quarters of 3% or greater real GDP growth, continued improvement in many labor market measures, rebounding energy prices, and increasing inflation expectations, among others. Across the major asset categories, global equities continued to witness positive momentum through October, a theme also shared by below
U.S. Economy Gathers Momentum
The U.S. economy suffered through a rough patch from early 2015 to late 2016 that was driven by a surging U.S. dollar, Chinese currency devaluations, and shifting central bank postures, among other headwinds.
Firming economic fundamentals—in
To conclude, the U.S. economy appears to have recently gathered steam, driven by firming economic fundamentals. This renewed strength has likely served as a tailwind behind the expected path of Fed rate hikes over the near term. In turn, anticipated rate hikes have the potential to truncate the ongoing business cycle expansion, which has lasted more than eight years as of this past summer—the third-longest business cycle expansion on record, according to National Bureau of Economic Research (NBER).
1 Bureau of Economic Analysis
2 Bureau of Labor Statistics
U.S. equity returns were strong in October, driven by earnings growth. The market continued to seemingly ignore geopolitical risks, focusing instead on company earnings and potential fiscal and tax reform.
Large capstocks continued to outperform small capstocks, reverting back from the brief small caprally during the prior period.
Strong returns in the technology sector helped growth continue to outperform against value. After the positive impact of hurricanes on energy prices in September, the energy sector lagged again in the month of October—in spite of rising oil prices—largely due to weaker reported earnings. Telecom stocks suffered from continued “cord-cutting” and a lack of demand for smartphone upgrades that harmed wireless carriers.
International developed markets lagged emerging markets over the month, performing mostly in line with domestic markets. Global growth remained strong over the month, and the Bank of England signaled a positive outlook in the U.K. as they raised rates for the first time since 2007.
Emerging and frontier markets had strong returns in October in spite of a strengthening dollar, as the region continued to outpace developed markets for the year. Asia, which comprises a significant weight in emerging markets indices, continues to be
keydriver of strength in the emerging markets. Taiwanese tech companies forecasted strong sales of semiconductors, and India benefited from government plans to spur growth.
Markets anticipated that the Federal Reserve would continue to support gradual interest rate hikes and the gradual reduction of its balance sheet, with a market-implied 100% probability of a rate hike in December 2017.
Jerome Powell, a former investment professional, was nominated to be the next Fed Chairman just after month-end. Expectations are that he will maintain viewpoints similar to those of the current Fed Chairwoman, Janet Yellen, although he may lean towards policies that favor less regulation.
The European Central Bank’s plan to extend its
bond buyingprogram through September 2018 was a key factor that contributed to the euro falling against the dollar in October.
The dollar strengthened amid continued signs of economic growth and rising rates in the U.S., contributing to
dollardenominatedemerging market bonds outperforming those held in local currencies.
The U.S. yield curve flattened slightly over the month of October, as the short end of the curve reflected the Fed’s intentions and continued to rise, while the long end remained relatively stable. Although a flat curve can be indicative of recessionary expectations, there remains ample steepness in the curve to quell any near-term fears.
Spreads of bonds with lower credit ratings, especially high yield bonds, have narrowed considerably. These compressed yields have fueled concerns that high-yield does not provide investors with adequate compensation for
below investment-gradecredit risk.
U.S. REITs were flat in October, but have posted positive single-digit returns
yearto- date. Strength in the self-storage, hotel, and office sectors was offset by declines in the data center and infrastructure sectors during the month. Concerns about supply growth were a key factor in weaker performance for the month, as companies reported growing supply in multiple property types, specifically selfstorageand data centers.
Oil prices rose to their highest level in over two years by the end of October, driven by a combination of global economic expansion and continued declines in crude inventories. Since late August, sentiment in the oil market has improved significantly, as the supply/demand outlook continues to strengthen.
Commodities gained approximately 2% during October, with energy, industrial metals, and livestock contributing to returns.¹ Gains in industrial metals—zinc, copper, and aluminum—were driven by demand exceeding supply by the largest margin in over a decade and potential future weakness in the dollar. Although agriculture remained a key area of weakness due to record-high inventories, livestock benefited from stronger exports.
1 Bloomberg, L.P.
Systematic macro managers enjoyed a favorable trading environment, as many of the market trends that emerged late in the third quarter continued into October. Most notably, the U.S. dollar trend continued due to the acceleration of tax reform and stronger than expected U.S. economic data.
macro performance was more muted, as key policy announcements from the European Central Bank and the Federal Reserve were in line with market expectations. Discretionary
Certain event-driven strategies benefited from Caesars' emergence from bankruptcy. Caesars tends to be widely-held across event-driven managers, particularly those investing in corporate restructuring situations.
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