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Perspectives from Above the Noise -- Week of October 1st, 2018

Perspectives from Above the Noise -- Week of October 1st, 2018

October 01, 2018

Stocks End Mixed Week. U.S. stocks ended a two-week rally, while finishing September slightly positive and posted its strongest quarterly gain since 2013. Investors turned cautious amid jitters over political intrigue in Washington D.C. and Italy’s stark budget-deficit increase. Meanwhile, President Trump signed a new funding bill, thereby avoiding a partial government shutdown before the mid-term elections.

Weekly Performance. For the week, the S&P 500 fell 0.51%, the Dow Industrials lost 1.07% and the tech-heavy Nasdaq Composite rose 0.76%. The S&P 500 rose 0.57% in September, extending its quarterly rally to 7.71%.

Key Economic Data. Investors learned last week that two readings of regional manufacturing slowed in September, pending home sales and personal spending cooled in August, while consumer confidence rose to an 18-year high. The Federal Reserve raised interest rates a third time this year and the final reading of second quarter economic growth held steady at 4.2%, the fastest pace of growth since 2014.

Telecom Services Performed Best. Just five of the 11 major sectors posted gains last week, led by the newly revamped Telecommunications Services sector (+1.06%), followed by gains in Healthcare (+0.90%) and Technology (+0.84%). Materials (-4.42%), the biggest gainer the week prior fell the most, with Financials (-4.02%) and Consumer Staples (-2.01%) also down the most.

Treasurys Little Changed. With the widely anticipated Fed rate hike, Treasurys were virtually flat last week, with the yield on 10-year notes down less than one basis point at 3.062%. The U.S. Dollar Index rallied, ending the week up nearly 1.0% at 95.132. Meanwhile, the Bloomberg Commodity Index (+1.0%) extended gains into a second week, reaching its highest level since early August. U.S. crude oil rallied 3.49% last week, ending at $73.25/barrel, a fresh four-year high.

What We’re Reading

China Agrees to Cut Some Tariffs

Healthcare Performs Best in 3Q

Canada Signs Onto Trade Deal

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Week’s Economic Calendar

Monday, October 1: Markit & ISM Manufacturing, Construction Spending;

Tuesday, October 2: No major releases;

Wednesday, October 3: ADP Private Sector Employment, Markit Services, ISM Non-Manufacturing;

Thursday, October 4: Jobless Claims, Durable Orders, Factory Orders Capital Goods Orders;

Friday, October 5: Non-Farm September Payrolls, Unemployment Rates, Average Hourly Wages, U.S. Trade Deficit.

 Market Watch
Dow Jones-1.07%1.90%9.26%7.04%18.23%
S&P 500-0.51%0.57%7.80%10.56%18.36%
Russell 3000-0.53%0.17%7.20%10.57%18.00%
MSCI EAFE-0.88%0.87%2.39%-1.43%3.28%
MSCI Emerging Markets-0.26%-0.53%1.07%-7.68%0.06%
Barclays Agg Bond0.17%-0.64%0.06%-1.60%-1.22%
Barclays Municipal0.17%-0.65%-0.11%-0.40%0.34%
Barclays US Corp High Yield0.17%0.56%2.45%2.57%3.13%
Bloomberg Commodity0.99%1.92%-1.32%-2.03%2.38%
S&P GSCI Crude Oil3.49%4.94%-0.27%21.23%42.10%
S&P GSCI Gold-0.42%-0.87%-4.38%-8.64%-7.18%
Source: Morningstar
Chart of the Week
Short-Term Yields Rising Faster than Longer Term
View larger image »
The Federal Reserve increased the federal funds target rate by 25 bps at last week’s Federal Open Market Committee (FOMC) meeting, moving the target rate to a range between 2.0% and 2.25%. It was the third rate hike this year and eighth of the current rate hike cycle, which began in December 2015. Based on the FOMC dot plot, the Fed is projecting one more hike in 2018 and three rate hikes in 2019. The Fed also increased their 4Q real GDP year-over-year growth projection from 2.8% to 3.1%. Additionally, the year-end unemployment projection dropped from 3.7% to 3.6%, a moderate drop from the current unemployment rate of 3.9%. The year-end core PCE inflation projection held steady at 2.0%. The path of short-term bond yields is highly correlated with the Fed’s target interest rate. As shown in the chart above, short-term government bonds rise and fall based on Fed policy moves. Short-term Treasury yields have risen faster than intermediate and long-term Treasurys, resulting in the flattest yield curve since 2007. As the Fed continues its path of interest rate normalization, we anticipate the yield curve to flatten further and potentially invert by 2019.
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The Bloomberg Barclays US Aggregate Bond Index, which was originally called the Lehman Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included. Eligible bonds must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 8.25 years. This total return index, created in 1986 with history backfilled to January 1, 1976, is unhedged and rebalances monthly.

The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. Payment-in-kind and bonds with predetermined step-up coupon provisions are also included. Eligible securities must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 6.3 years. This total return unhedged index was created in 1986, with history backfilled to July 1, 1983 and rebalances monthly.

The Bloomberg Barclays US Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. Many of the subindicies of the Municipal Index have historical data to January 1980. In addition, several subindicies based on maturity and revenue source have been created, some with inception dates after January 1980, but no later than July 1, 1993. Eligible securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s and S&P and have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 12.8 years. This total return index is unhedged and rebalances monthly.

The Bloomberg Commodity Index is a broadly diversified index that measures 22 exchange-traded futures on physical commodities in five groups (energy, agriculture, industrial metals, precious metals, and livestock), which are weighted to account for economic significance and market liquidity. No single commodity can comprise less than 2% or more than 15% of the index; and no group can represent more than 33% of the index. However, between rebalancings, group weightings may fluctuate to levels outside the limits. The index rebalances annually, weighted 2/3 by trading volume and 1/3 by world production.

The CBOE Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Introduced in 1993, the VIX Index has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.

The MSCI All-Country World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. The SMCI ACWI consists of 46 country indexes comprising 23 developed and 23 emerging market country indexes. The developed country indexes include: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the Uninted States. The emerging market country indexes included are: Brazil, Chile, China, Colombia, Czech Republic, Eygpt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey and United Arab Emirates.

The MSCI EAFE Index is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.

The MSCI Emerging Markets Index is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.

The MSCI Europe Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe.

The MSCI Pacific Index captures large and mid-cap representation across five Developed Markets (DM) countries in the Pacific region. With 470 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The S&P GSCI Crude Oil Indexis a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark for investment performance in the crude oil market.

The S&P GSCI Gold Index a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold futures market.

West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.