The company lowered its long term growth forecast, sending the stock down -14.5% during the period, and dragged many other Health Care companies across the globe with it. Consumer Staples were the next worst performing sector, losing -5.83% on the month.
On a more positive note, Financials, Energy, and Materials sectors were positive, gaining +2.35%, +1.24%, and +0.70%, respectively.
Materials and Energy sectors have led the way on a year to date basis, having gained +25.74% and +23.38%, respectively, as commodity prices have rebounded. Financials on the other hand are just now into positive territory for the year, up +2.19% after October’s gains.
From a valuation standpoint, developed international equities remain slightly overvalued in our opinion, with trailing price to earnings multiples above their long-term averages.
Emerging Markets are slightly more attractive, but we remain cautious given the macroeconomic headwinds and the prospects for rising interest rates in the U.S.
Fixed Income
The yield curve steepened measurably during October as the odds for a December interest rate hike rose from 59% on October 1 st to 72% by month’s end. Although the FOMC is meeting this week, it’s virtually certain that no action will be taken given the absence of a post-meeting press conference in November.
The yield on the 2yr Treasury note rose +8 basis points on the month while the 5yr rose +0.16%, the 10yr up +0.23% and the 30yr Treasury bond saw it’s yield jump +0.27% to 2.58%. Meanwhile the US Dollar rose nearly 3.0% during October, triggering what many would consider to be a de facto tightening of monetary policy. Government bonds were most impacted by the sell-off in October with global sovereigns taking the brunt of the selling.
The ML Global Government Bond II Index fell -1.37% on the month followed by the ML US Treasury/Agency Master Index which dipped -1.12%.
Both indices, however, still sport robust gains on the year north of +4%. US municipal bonds as measured by the ML Municipal Master Index fell -0.94% while the ML US Corporate Master Index declined -0.83%. US high yield actually posted positive returns on the month as the ML US High Yield Master II Index rose +0.31% and is now up +15.68% year to date.
2016 is on pace to mark the largest issuance of US corporate debt ever, with over $1 trillion in debt having been issued through Q3. 2015 was the previous high water mark with $1.2 trillion in US investment grade debt issued.
Given historically low interest rates, continued strong investor demand and a low-volatility muddle-through economy, the stars are aligned for corporations to lever up their balance sheets and lock in low-cost debt financing for the next 10-20 years.
Many astute investors, however, are questioning the use of proceeds for many of these companies as these newly minted funds get used on short-term or one-time operations like share buybacks. While rewarding shareholders, creditors are left with a more levered institution and a higher default risk.
It’s likely that Fed Chair Yellen will use Wednesday’s meeting to further prepare the markets for a December rate hike. Although this is pretty much priced in, the pace of future hikes in 2017 is uncertain. The sooner investors get some clarity on “how much” and “how often”, the better off we’ll all be.
Alternative Investments
Broadly speaking, alternative investments fared poorly in October due to strength in the U.S. Dollar. The Dollar, as measured by the DXY Index, rose +3.1% on the month, marking the highest close since the end of January 2016.
October also marked the best monthly performance for the DXY Index since November 2015, right before the Federal Reserve raised interest rates by 0.25% back in December 2015.
Looking ahead, the Fed Funds futures, a market based probability of an interest rate hike, currently imply a 72% chance of a December rate hike when the Federal Reserve Open Market Committee (FOMC) meet December 13th & 14th . Strength in the Dollar caused Real Estate Investment Trusts (REITs), and other bond-like equity sectors to sell off. REITs, as measured by the FTSE NAREIT All REIT Index, fell -5.1% during the month.
This compares to other defensive U.S. equity sectors such as HealthCare and Telecoms, which lost -6.53% and -6.47% respectively, albeit partly for company specific reasons. Gold was also impacted by a rising Dollar and fears of an interest rate hike, as the precious metal shed -2.9% to close the month at $1,277 per ounce, down from a monthly closing high of $1,351 per ounce back in July, which was the highest monthly close in more than three years. Dollar strength also impacted commodities, as measured by the Bloomberg Commodities Index, which lost -0.5%.
The overall performance of commodities was helped by strength in Grains, which offset weakness in West Texas Intermediate (WTI) crude oil, which lost -2.9% on the month, to close just under $47/barrel. Part of oil’s weakness also stems from OPEC oil Ministers’ failure to reach an agreement on production cuts last weekend.
The recent move up in crude oil to the $50/barrel level was largely predicated on OPEC members agreeing to a cut, which still has not happened. Bloomberg estimates that OPEC production rose to an all-time high of 33.75 million barrels per day in September, thanks to increasing production from Iraq and Iran.
The current supply/demand imbalance will come to a head again when OPEC members meet November 30th in Vienna. This is starting to sound like a broken record…
Finally, from a currency perspective, the Loonie weakened to $1.34 CAD/USD on the back of crude oil weakness, and the Yen weakened to 104.8 JPY/USD thanks to Dollar strength.
Moving forward, both the Pound and Euro will remain in focus postBrexit, as both currencies continue to weaken. The Pound remains the biggest question mark, down more than -20% against the Dollar in the past year to $1.22 USD/GBP thanks to Brexit uncertainty.