The great “muddle-through” economy continued in earnest during October as all signs pointed to a US economy moving along at a moderate rate of growth, giving the Fed ample leeway to take a measured approach to interest rate recalibrations.
As frustrating as these low interest rates are to many savers, they continue to spur economic activity, whether it be corporate M&A, new home sales or borrowing to buy a new car.
December’s anticipated quarter-point move will likely do little to derail this steady, if unspectacular economic expansion.
The US unemployment rate for September ticked up slightly to 5.0% from the prior month’s 4.9%, with nonfarm payrolls expanding by +156,000, below estimates of +172,000. Private payrolls grew by +167,000 while manufacturing saw a decline of -13,000 jobs.
Average hourly earnings ticked up +0.2% MoM and +2.6% YoY while the average work week held steady at 34.4 hours. The Labor Force Participation rate climbed slightly to 62.9% while Initial Jobless Claims dipped below 250,000, continuing the long downward trend in this data series.
Prices crept higher in September with the Producer Price Index registering a higher than expected +0.3% MoM rise (+0.7% rise YoY) while the core measure of wholesale prices (ex-food & energy) ticked up +0.2% MoM and +1.2% YoY. At the consumer level, prices rose +0.3% MoM and +1.5% YoY while core CPI edged up +0.1% MoM and +2.2% YoY.
The Fed’s preferred measure of inflation, so-called Core PCE or the Personal Consumption Expenditure measure, edged up 0.2% in September and is up +1.7% YoY, darn close to the Fed’s +2.0% target. The one area of the economy that appears most at risk is the manufacturing sector.
Aside from the job losses mentioned above, Durable Goods Orders for September fell -0.1%, after rising just +0.1% in August. Industrial Production rose a meager +0.1% last month while Capacity Utilization came in at 75.4%, about a percentage point below the 10-year average for this indicator which measures the US’s capacity to produce goods and services.
Lastly, and on a bit of a positive note, the Markit US Manufacturing PMI for September came in at 51.5 while the preliminary reading for October showed a rise to 53.2, meaningfully above expectations.
All three S&P Market Cap Indices fell this month, with Large-, Mid-, and Small- declining -1.82%, -2.67%, and -4.48%, respectively.
Mid-Cap stocks, as measured by the S&P 400 Index, took leadership among it’s market cap peers this month, with a total year to date return of +9.40%.
Large-Caps trailed, only up by +5.87%, while Small-Caps were a close second at +8.77%. Value Stocks, as measured by the S&P 500 Citi Value Index, fell -1.51% in October, bringing the year to date performance of the index to +7.71%.
Growth stocks reversed last month’s trend, underperforming Value stocks by -61 bps. Value widened it’s year to date outperformance over Growth stocks by more than 350 bps.
Valuations contracted over the last month but continue to look in-line or slightly expensive relative to long term averages.
Small-Cap stocks, currently trading at 23.4x trailing earnings, look to be the cheapest compared to the long term average of 22.9x. From a sector standpoint, Financials and Utilities were the only positive performing sectors in October, rising +2.3% and +0.9%, respectively.
Financials continue to rise on the ever-increasing Fed rate hike expectations, which should be a boon to bank earnings. Energy still leads the other sectors this year, climbing just over +15% year to date. WTI Crude Oil fell -3% in the quarter, closing the month at $46.89/bbl, lower than the 52 week high of $51.60/bbl observed on 10/19. Oil is up +26.5% this year, aiding Energy company earnings and lowering the likelihood of defaults within the sector.
Health Care and Telecoms were the worst performers this month, declining -6.53% and -6.47%, respectively. Health Care is the only sector with negative performance for the year, falling -5.25%. Drug pricing concerns that have been made a priority for politicians, failed drug trials, and the rise of generic drugs have weighed heavily on this sector.
The Biotechnology Industry group, which represents around 20% of the Health Care sector, is down just shy of -17% this year. Verizon’s falling subscriber base, along with AT&T’s recent bid to merge with Time Warner, hurt Telecom’s performance on the month. Verizon and AT&T are down -6.4% and -8.3% MoM, respectively.
International equity markets were broadly negative on the month, with the MSCI EAFE Index down -2.03%, while Emerging Markets, as measured by the MSCI EM Index managed to eke out a +0.25% gain.
On a country specific basis, Japan, China, and the United Kingdom outperformed their respective indices, gaining +5.93%, +3.19%, and +1.03% during the period.
At a regional level, the Eurozone, as measured by the MSCI EMU Index gained +1.38%; however, the region is still down -1.19% year to date, and has underperformed broad developed international equity markets.
At the sector level, MSCI ACWI ex U.S. sectors were mostly negative, led lower by Health Care, which lost -7.05% during the period as Novo Nordisk, a Denmark-listed pharmaceutical company, ushered in new wave of uncertainty surrounding drug price increases.