EWM Macro View-September 2017

Domestic equity markets continued their move higher in September, with the major US indices closing the month at or near record-level territory. The S&P 500 and NASDAQ Composite both ended the month at record levels. In a familiar theme throughout 2017, investors once again filtered out much of the noise and largely discounted concerns that would typically have a negative impact on markets. Several of these anxieties include geopolitical headlines from North Korea, a more hawkish Federal Reserve (Fed), the financial impact from several large scale storms that hit Texas, Florida, and Puerto Rico, and a slight setback in a push for a centralized and more efficient euro zone from German elections. Despite these events, the S&P 500 recorded its least-volatile September in history and has continued the trend of 2017 being the least volatile year on record. However, October is historically the most volatile month, so we may see some of that calmness abate. At its September meeting, the Federal Open Market Committee (FOMC) voted to begin trimming the $4.5 trillion balance sheet, through its balance sheet normalization program that had built up through quantitative easing since the Great Recession. The third reading on 2nd quarter (Q2) gross domestic product (GDP) was +3.1%, a slight uptick from the prior reading. Strength in consumer spending, which makes up more than two-thirds of the US economy, at +3.3%, was a larger driver of the overall improvement from +1.2% in the 1st quarter (Q1).

Within this context, domestic equities were mostly positive during the month. The S&P 500 gained +2.1%, pushing its year-to-date return to +14.2%, while the NASDAQ Composite posted slightly weaker returns of +1.1% but closed out a strong third quarter with a gain of 6.1%, improving its year-to-date performance to 21.7%. Small cap widely outperformed large cap by over 400 bps in September, as the Russell 2000 Index returned +6.2%, compared with +2.1% for the Russell 1000 Index. The small cap outperformance story carried across investment styles, with the Russell 2000 Growth posting a gain of 5.5% and Russell 2000 Value gaining 7.1%. Also reversing a large trend from this year, value stocks outperformed growth stocks, with the Russell 3000 Value gaining +3.3% vs. +1.6% for the Russell 3000 Growth. Despite the gain for value in September, the year-to-date difference of growth outperforming value stands at 1270 bps. In terms of sector performance, Energy was the strongest performer, gaining 10% in the month, followed by Financials, which gained 5.4%. Utilities and Real Estate were the main laggards, losing -2.7% and -1.4%, respectively. Energy prices rose, but more broad-based commodities were relatively flat, as metals sold off.

International equity markets were relatively mixed versus domestic equities. The MSCI ACWI ex-U.S. Index increased by +1.9% for the month and is now up +21.1% year-to-date. International developed markets rallied behind continued improvement in the global economic landscape, which has fueled much of the return this year. Eurozone GDP growth was +2.3% year-over-year in Q2, picking up speed from Q1, behind higher consumer spending. The MSCI EAFE Index, which measures performance of international developed equities, gained +2.5%. In a break in the trend from what has already been a very strong year, emerging markets equities traded lower on the month, finishing down -0.4%, but are still up +27.8% year-to-date. Regionally, Europe and Japan were strong performers, gaining +3.3% and +2.0%, respectively. After the strong month, the MSCI Europe Index is now up +22.8% year-to-date. China struggled relative to its peers, with only a +1% gain, cooling off from the strength it has shown this year, with a nine-month return that stands at +43.2% year-to-date.

Fixed income markets mostly traded lower for the month, as yields moved higher. The yield on the 10-Year Treasury Note began the month at 2.12%, and traded as low as 2.03% earlier in September, defying market expectations. However, as markets began to give more credence to central bank tightening, and the Federal Reserve announced its plan to begin unwinding its balance sheet, government bonds sold off and yields spiked, with the yield on the 10-Year Treasury Note closing the month at 2.33%, up 21 bps for September. The Barclays U.S. Aggregate Bond Index fell by -0.5% for the month, and is now up +3.1% year-to-date. Global bonds trailed on the month but are still out ahead of domestic fixed income in 2017.The Barclays Global Aggregate ex-U.S. Index lost -1.3% behind a stronger US dollar, and is now up +8.7% year-to-date, with a weaker US dollar fueling much of the this year’s returns. Municipal bonds posted slight losses comparable to their taxable peers, losing -0.5%, and are now up 4.7% year-to-date. High yield fixed income performed better, in accordance with the risk-on sentiment that also has been visible within fixed income, as the Barclays U.S. Corporate High Yield Index increased by +0.9% and is now up +7.0% year-to-date.

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