GLOBAL EQUITIES

TRADE AND CENTRAL BANKS REMAIN IN FOCUS

The S&P 500 Index rose 1.7% in a relatively calm September that saw no daily drops of more than 1% for the index. The gains reversed August’s losses and left the index up a solid 18.7% year to date, its best start to a year through September since 1997. On a total return basis including dividends, the index returned 1.9% for the month and 20.6% year to date. The Dow Jones Industrials produced returns similar to the S&P 500 for the month, while the growth-focused Nasdaq Composite lagged as value stocks surged. Year to date, the Nasdaq has still produced the best return among the major averages.

Mostly better than expected U.S. economic data, improving trade headlines, and a rate cut from the Federal Reserve—the second cut this year—all helped buoy investor sentiment in September. The U.S. economy has remained resilient despite trade uncertainty. The most recent data pointed to third quarter economic growth consistent with the trend of the current expansion, despite tariffs and heightened political uncertainty. Meanwhile, cautious economic signals coming from the bond market lessened somewhat.

Trade headlines have generally improved in recent weeks. U.S. and China negotiators are scheduled to meet October 10, and China recently began purchasing U.S. soybeans and pork products again. Reports that the United States would curb U.S. investment in China surfaced and were quickly refuted by the White House. Market watchers seem to expect a narrow agreement between the two nations, but that still may be enough to help shore up business and investor confidence.

While the impeachment process will continue to receive a lot of press attention, we do not expect much impact on the economy or markets. The main risk is that the political discourse may harm investor confidence.

September saw some reversals in asset class and sector performance. For the first time since February, small cap stocks outpaced large caps based on the Russell 1000 and Russell 2000 indexes. Large caps fared better in only three sectors, suggesting widespread bargain hunting in underperforming small cap stocks. Midcaps still lead year to date with a 21.9% return, ahead of the 20.5% and 14.2% advances for large and small caps, respectively, based on the Russell indexes.

Value stocks also staged a reversal, outpacing their growth counterparts for just the second time in the past 10 months based on the Russell 1000 style indexes. Growth was hurt most by weakness in the communication services, consumer discretionary, and technology sectors, while value was helped by strength in financials. Growth still leads value by more than 5 percentage points year to date.

September’s sector rankings lined up with the market’s preferences on style, with energy, financials, materials, and utilities—all value-oriented sectors—atop the sector leaderboard. Financials and utilities are an odd pairing given interest rates rose during the month—normally good for financials but not for utilities. Energy was clearly helped by the spike in oil prices after the mid-September attack on Saudi Arabian oil facilities, even though those gains proved fleeting after production was quickly restored. 

FIXED INCOME

10-YEAR YIELD REBOUNDS IN SEPTEMBER

U.S. Treasury yields rebounded in September as trade optimism and improving economic data buoyed the appetite for risk.

The 10-year yield increased 17 basis points (0.17%), its biggest monthly gain since September 2018, to close at 1.66%. The yield curve steepened in September, as long-term yields’ rally outpaced short-term yields. The spread between the 2-year and 10-year yields climbed out of inversion territory (when long-term yields fall below short-term yields) after falling briefly negative in August. The spread between the 3-month and 10-year yields closed at -16 basis points (-0.16%) and has largely stayed inverted since the end of May.

Six of 11 fixed income asset classes we track rose in September, as shown in the Fixed Income Performance Table. Riskier debt outperformed, as dollar-denominated emerging markets debt led with a 1% gain. The Bloomberg Barclays U.S. Aggregate Index fell 0.5% after six straight months of gains.

ALTERNATIVE INVESTMENTS

VALUE RALLY SUPPORTS MARKET NEUTRAL

The HFRX Equity Market Neutral Index led monthly sub-strategy returns with a gain of 1.6%, as managers in the industry benefited from a significant factor rotation between value and momentum stocks. Specifically, momentum stocks endured a sharp drawdown, while value experienced a strong rally on both an absolute and relative basis. While market neutral strategies often have exposure to both factor sets, there is typically a value overweight, which has acted as a significant headwind throughout 2019. This is evident in the 1.3% year-to-date decline in the index.

With a gain of 0.9%, the HFRX Equity Hedge Index saw less of an impact from the sudden factor rotation. This represented an up-capture of approximately 47% of the 1.9% gain in the S&P 500, which is in-line with the industry’s beta-adjusted exposure. The HFRX Event Driven Index also performed well, returning 1.1%. Common positions related to Government Sponsored Enterprises supported performance as the Federal Housing Finance Agency (FHFA) released a potential long-term road map and recapitalization of the entities. 

The HFRX Systematic Diversified Index declined 2.1%, as losses in fixed income exposure weighed on portfolios. Heading into September, trend-following strategies held significant long exposure to global bonds across all maturity levels; however, this trend quickly reversed during the first half of the month. Additionally, the previous upward price trend in gold and silver contracts retreated, leading to losses within commodity trading. Year to date, the index has now gained 8.3%, the majority of which was provided by long fixed income exposure.   

REAL ASSETS 

REAL ESTATE AND INFRASTRUCTURE
POST SOLID GAINS

Real estate and infrastructure posted solid gains in September, a broadly positive month for liquid real assets.

Master Limited Partnerships (MLP)

The Alerian MLP Index gained 0.7% in September, lagging behind the broad equities indexes and other liquid real asset categories we track despite solid gains for the energy sector and high-dividend paying sectors. Losses in crude oil and rising Treasury yields reduced demand for income-oriented energy infrastructure investments, while partnership-specific challenges continued to weigh on the group. Year to date the 11.1% return for the Alerian MLP Index has lagged behind broad equities and the other major real asset categories.

REITs and Global Infrastructure

The MSCI U.S. REIT Index posted another strong month in September, outperforming the S&P 500 with its 2.9% return and leaving the domestic real estate investment trust (REIT) index’s year-to-date return at a stellar 26.8%. The industrial sector was the month’s top performer, solidly outperforming the broad real estate index amid the ongoing e-commerce boom that is driving warehouse and distribution facility demand.