By Salvator J. Bruno, Chief Investment Officer and Managing Director for IndexIQ

Markets

  • Despite some volatility to finish out the month, the S&P 500 index resumed its winning ways returning 1.87% in September. U.S. small caps followed a similar though more volatile path as large caps, returning 2.08%. Early October results have been testing this support on weaker economic data fueling growth concerns.
  • Global markets rallied with the MSCI EAFE returning 2.87 % on expectations for a more accommodative monetary policy position. Emerging Markets slightly worse with the MSCI EM index returning 1.91%.
  • The U.S. yield curve steepened ever so slightly with Long-Term yields rising modestly but still more than short-term yields, resulting in the 2 and 10-year yield spreads going slightly positive.
  • The Bloomberg Barclays US Aggregate bond index was down -0.53% and the US Universal (US Aggregate plus High Yield) index returned -0.43%.
  • The Bloomberg Barclays US Short Term Treasury index returned 0.16% while the ICE BoAML US Treasury 20 year+ Index returned -2.56%. The iBoxx Investment Grade Index returned -0.86% and the iBoxx High Yield Index was up 0.30%.
  • Oil prices fell by -1.87%.
  • In other commodities, Gold and Silver were down by -3.15% and -7.51% respectively. Copper rose 0.70% but Aluminum fell by -1.32%.
  • 6 of the 7 tracked hedge fund strategies performed positively in August. Global Macro was the only negative performing strategy. Equity Market Neutral and Event Driven had the largest positive returns.

Economic Data

  • The third reading of Q2 2019 GDP QoQ growth came in at 2.0%. The prior 3 quarterly GDP growth figures were 3.1% for Q1 2019, 2.2% for Q4 2018 and 3.4% for Q3 2018.
  • The August CPI (YoY) report showed Headline inflation of 1.7%, down from 1.8% in the prior report. Core CPI remains rose to 2.4% versus 2.2% from the prior report. On a MoM basis, Headline inflation was 0.1% and Core inflation was 0.3%.
  • The most recent ISM manufacturing index reading was lower than the revised measure for July at 49.1, failing to meet expectations. The ISM non-manufacturing index rose from the prior month to 56.4 and beat estimates.
  • In housing, New Home Sales and Housing Starts were up sharply for the month as were Building Permits and Existing Home Sales.
  • The Unemployment Rate stayed at 3.7%. The change in Non-Farm Payrolls came in below 200,00 at 130,000, missing expectations.
  • The Conference Board Consumer Confidence indicator dropped sharply to 125.1 defying expectations of 133.

Central Bank

  • The U.S. Federal Reserve met on Sept 18 and cut the Fed Funds rate by 0.25% to a range of 1.75% to 2.00%. The next Fed meeting is October 30th and the markets are expecting another 0.25% rate cut.
  • The ECB further cut the interest rate om the deposit facility by -0.10% to -0.50% signaling a willingness to continue providing monetary stimulus through rate-cuts and asset purchases.

When Bad News is Good News

Weakening economic data has been met with higher stock prices as investors’ thirst for ever lower rates helped to buoy the markets. Despite Tariffs, trade wars and tweets all led to decreased growth expectations. Despite a downward trend in corporate earnings, stock prices continued to climb in September, leading to higher valuation multiples.

The bond market yield curve remains flat with the 10-year Treasury yield (1.68%) slightly above the 2-year rate of 1.62%. The short end of the curve (1-3 months) was a little higher at 1.75%-2%. 2% while the long end of the curve (30+ years) was in the 1.7% range. The range of yields remains very tight.

Credit spreads widened out. Combined with longer term rates rising modestly, there was pressure on investment grade corporate bonds.

Employment remains strong and the unemployment rate continues to remain near historically low levels. Wages have been improving although it appears that the economic headlines might be taking a toll on consumer psyche as the consumer confidence index took a hit. Still, the consumer has remained resilient thus far with retail sales and durable goods orders rising. Despite a strong capacity utilization reading and rising industrial production, slowing GDP and falling ISM could point to a more problematic economic outlook.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.

The MSCI Emerging Markets (EM) Index captures large and mid-cap representation across 24 emerging markets countries.

The Bloomberg Barclays US 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 securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and nonagency). Bloomberg Barclays US Universal Index includes high yield.

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