This article was originally published on ETFTrends.com.
The revised snapshot of the U.S. economy improved in November with third quarter GDP expanding at a revised +2.1% annualized rate, up from +1.9% at our last look, and +2.0% in the second quarter.
Personal Consumption Expenditure (PCE) excluding Food and Energy increased +1.4% in the third quarter, down from +2.2% in the second quarter. With the consumer representing nearly 70% of the U.S. economy, all eyes will surely be on the holiday spending season to see just how strong the consumer is.
Early data from Adobe Analytics shows $7.4 Billion was spent on Black Friday (+10.6% Y/Y), and projects $9.4 Billion will be spent on Cyber Monday (+19% Y/Y). Adobe tracks retail sales for 80 of the top 100 online retailers in the U.S.
After last month’s Fed rate cut (the third so far this year) interest rates were largely unchanged on the month, with the benchmark 10-Year Treasury yielding 1.79%, down 5 basis points from last month’s close. Low interest rates continue to be a boon for the housing market, with Mortgage Applications rising +1.5% in November according to the Mortgage Bankers Association. Housing Starts rose to 1,314K in October, up from 1,266K in September, a continuation of a slow and steady, albeit volatile, trend.
Factory Orders decreased -0.6% M/M in September, a step backwards from August’s -0.1% M/M drop, highlighting the softness in U.S. economic data. This has been compounded by continued weakness in the U.S. manufacturing sector (November ISM came in at 48.1, down from 48.3 in October, and shy of expectations for a rebound to 49.2). Readings below 50 signal contraction, and November’s reading was the fourth straight month of contraction in the sector.
The Unemployment Rate ticked up one tenth of a percent to 3.6% and Initial Jobless Claims remained subdued at 220,000. The Conference Board’s Consumer Confidence level dipped to 125.5 in November, from 126.1 in October, also the fourth straight month of decreasing confidence levels. The Conference Board indicator appears to have peaked in October 2018 at 137.9, just before the marked entered correction territory in Q4 2018.
Taken as a whole, U.S. economic data continued to weaken in November, with the Citi U.S. Economic Surprise Index falling into negative territory intra-month (readings below zero signal data missing market expectations), only to rebound heading into month end to close in positive territory at 13.1. Stay tuned.
U.S. Equities closed the month of November near record highs. The benchmark S&P 500 Index had it’s best monthly showing since June, rising +3.63% to close at 3,141, up +27.63% for the year. Mid- and Small-Caps also posted strong gains, with the Mid-Cap 400 and Small-Cap 600 Indices gaining +2.96% and +3.05%, respectively. For the year, Mid- and Small-Caps have underperformed their Large-Cap brethren, but still posted strong gains of +22.72% and 19.18%, respectively. Looking at the MSCI USA universe through an Environmental, Social, and Governance (ESG) lens outperformed the broader market in November, with the MSCI USA Enhanced ESG Focus Index returning +3.83%. For the year, the ESG focused index has posted gains of +28.53%, outperforming the S&P 500.
From a style perspective, Value stocks, as measured by the S&P 500 Citi Value Index, outperformed the broader market, returning +3.86% for the month. Value also outperformed Growth stocks, as measured by the S&P 500 Citi Growth Index, which returned +3.43% on the month. For the year, Value has a slight edge over Growth in terms of performance, returning +27.94%, versus +27.40% for Growth.
At the sector level, 9 of 11 sectors finished the month in positive territory, with rate sensitive sectors such as Real Estate and Utilities the only negative performers, losing -1.72% and -1.94%, respectively. Technology was the best performer, gaining +5.36% on the month, extending its year to date gains to +43.83%, by far the best performing slice of the market. Digging deeper into technology, Apple gained +7.75% during the month to close near an all-time high, while Microsoft gained +5.95%, also near an all-time high. Apple and Microsoft have returned +71.98% and +51.26% respectively for the year, and now have market capitalizations of $1.177 Trillion and $1.144 Trillion!
Looking ahead, U.S. equities look priced for a lot of good news. Resolutions on trade look priced in, and investor focus should turn to the Holiday spending season and Q4 earnings due out in January. With the S&P 500 set for a flat-ish earnings year, and expectations for double digit earnings growth in 2020 that are likely to be revised lower, market risks appear skewed in a world of ultra-low interest rates.
International equities were a mixed bag in November. Developed International equities, as measured by the MSCI EAFE Index, rose +1.16% on the month, and are up +18.88% for the year.
Emerging Markets, as measured by the MSCI EM Index, lost -0.13% on the month, but remains up +10.51% for the year. Taken as a whole, Global Equities, as measured by the MSCI ACWI Index (both Domestic and International Equity) are up +22.94% for the year, and have now gained an annualized +7.86% for the trailing 5-year period.
Looking at International Equities from an Environmental, Social, and Governance (ESG) lens, the MSCI EAFE Ext. ESG Focus Index gained +0.99% for the month, slightly trailing the non-ESG MSCI EAFE Index; however, the Ext. ESG Focus Index has outperformed year to date, up +19.49%. In Emerging Markets, the MSCI EM Ext. ESG Focus Index rose +0.02% on the month, outperforming the non-ESG MSCI EM Index. It too has outperformed on a year to date basis, rising +11.21%, compared to +10.51% for the MSCI EM Index.
At the country and region level, Japanese equities, as measured by the Nikkei 225 Index, rose +1.60% in JPY terms, while U.K. equities, as measured by the FTSE 100 Index, rose +1.82% in GBP terms. Weakness was felt in China and Hong Kong, with the Shanghai Composite Index falling -1.94% in CNY terms, and the Hang Seng Index dropping -1.96% in HKD terms as tensions remain between the two countries. Regionally, the Eurozone rose +2.66% in EUR terms during the month, and is now up +25.19% for the year.
Lastly, looking at individual sectors, 8 of 11 sectors ended the month with positive returns, while interest rate sensitive sectors such as Utilities, Real Estate, and Consumer Staples posted monthly losses, down -2.08%, -1.21%, and -0.20%, respectively. Healthcare was the top performing sector, up +2.74% on the month, and +23.80% for the year, outperforming U.S. Healthcare (+16.64% YTD).
The Federal Reserve lowered its target rate on October 30th. The yield curve has moved a touch higher since then, including this morning’s levels. The move higher has steepened the yield curve, and there is no current inversion of either the 3 month/10 year curve, or the 2 year/10 year curve.
Credit spreads continue to trade at relatively tight levels, given the current global economic statistics, and where we are in the business cycle. This past month, spreads of Investment Grade and High Yield bonds contracted further, leading to strong returns. It is notable because higher yield levels in the month were a headwind for bond prices.
This headwind is clearly illustrated in the monthly return for the US Government Bond Index. With Government bonds offering lower yields (commensurate with their lower risk), and not benefitting from the spread tightening that occurred in the credit market, the index posted a return of negative 29 basis points. The US Aggregate Index is a blend of Government and Credit exposures, meaning some of its holdings were able to benefit from the spread tightening in the credit markets, and as such, its performance came in between that of the Government Index and the Investment Grade credit returns.
Municipal bonds posted another strong month. Supply remains restricted, while demand appears to be limitless.
Significant amounts of money continue to flow into this space, supporting what may seem like pricey valuations.
With a Presidential election in the offing, and many potential candidates likely to increase current tax brackets, these valuations could prove to be somewhat reasonable.
The Global Aggregate Index faced the same headwind of rising rates, offset by low (or compounded by negative) government bond yields. This led to a return quite similar to what was experienced in the US Government bond market for the month.
The relatively long duration of the Green Bond Index worked against it in October, producing a loss in line with the other high credit quality indices.
Alternative investments were a mixed bag in November, largely driven by strength in the U.S. Dollar. The Dollar, as measured by the DXY Index, rose +0.95% to close at 98.27, which is just below its high for the year. The Dollar’s strength was notably felt in Gold spot prices, which lost -3.24%, or nearly $49/oz, to close at $1,464/oz. Gold prices have consolidated in recent months after a sharp run up over the summer. It should be noted, however, that Gold prices are still up +14.15% for the year.
The Dollar’s strength was also felt in the commodities space, with the Bloomberg Commodities Index losing -2.68% on the month, despite a gain in oil prices. West Texas Intermediate (WTI) crude oil gained +1.83%, or nearly $1/bbl, on the month to close at $55/bbl. Oil prices have remained range bound for the better part of the last six months. Expected OPEC production cuts could give crude prices a boost in the near term; however, the long-term trajectory of WTI prices remains a supply and demand equation. It should be noted that Saudi Aramco, the state-owned oil behemoth of Saudi Arabia is looking to sell shares to the public (1.5% of the company) at a valuation that could top $1.7 Trillion! Initial orders look strong from Saudi investors; however, global institutional investors appear to be steering clear.
Real Estate, as measured by the FTSE NAREIT All-REIT Index, lost -1.56% on the month as high interest rates impacted defensive income sectors. REITs remain up +22.86% for the year.
Looking at the Hedge Fund space, 8 of 10 strategies posted positive returns on the month, led by Event Driven strategies (+1.85%), while Equity Market Neutral (-0.20%) and Distressed Securities (-0.09%) were the two bottom performers. For the year, the top performing strategy is Equity Hedge (L/S), up +9.65%, while Equity Market Neutral (-0.93%) and Merger Arbitrage (-0.46%) remain stuck in negative territory.
From a currency standpoint, most majors were slightly weaker against the Dollar, while the Pound was flat.
POPULAR ARTICLES AND RESOURCES FROM ETFTRENDS.COM