Week in Review: October 16, 2017



Equity markets across the world continued their positive momentum as investors weighed inflation data and the prospects of a December rate hike by the U.S. Federal Reserve. The S&P 500 returned 0.2%, while the MSCI EAFE index gained 1.6% and the MSCI EM index returned 2.1%.


To Raise or Not to Raise


Minutes from the Fed’s September meeting signaled that a rate hike in December is likely; however, the Fed governors did not all agree on the inflation outlook and the state of the economy. While the majority of Fed governors (Janet Yellen included) see weak inflation data as transitory and are pushing for a December rate increase, a smaller group has concerns that weak inflation is likely to persist is signaling underlying weakness in the economy. In their view, the economy is vulnerable and premature increases in interest rates would be damaging. Even with this internal debate, the market responded by feeling even more certain of an increase with a 76% likelihood up from 63% just a few weeks ago. 

While this hawkish majority feels confident about their outlook, a misstep could have real consequences. An overly aggressive move could trigger a flattening of the yield curve, meaning short-term rates would be equal to long-term rates or possibly even invert the yield curve—where short-term rates are higher than long-term.  Although a rate increase at this point would be a step towards normalization in a market that appears ready, investors on the whole seem to expect the Fed to move more slowly than what is outlined for the next 12 months in the Fed’s public statements. 

The September Core Producer Prices Index (PPI), which strips out more volatile food and energy prices, rose only a modest 0.2% and on a similar note, the Core Consumer Price Index (CPI) released on Friday showed only an increase of 0.1%—the sixth time it has fallen short of expectations in the past seven months. 

Wildfires in Northern California spread throughout the course of the week, costing lives and damaging thousands of structures and businesses in the region. Nine counties have declared a state of emergency, and at this time we are closely monitoring the situation both for the personal safety of our colleagues, friends, and family in the region and also for any effect on local municipal bonds. Any short-term, medium-term, and/or long-term credit risks related to these fires will be re-examined as damage is realized and reported. Historically, natural disasters are not likely to cause significant long-term fiscal stress for most municipal issuers and we expect the impacted areas will receive both state and federal aid pending approval and/or appropriation.

Looking globally, major equity markets in Asia have surged recently. The Nikkei index in Japan breached 20,000 on Monday for the first time since December 2015, driven by a weaker yen and positive economic data that have lured foreign investors back to the world’s third-largest market. The rally also came as the nation’s corporate profits climbed to a record and had the longest string of quarterly economic expansion in more than a decade. 

Additionally, the Shanghai Composite in China has rallied 10.9% since 05/10/2017—its year-to-date low. The Shanghai gauge, which is dominated by large state-owned banks and oil companies, has recovered almost all its losses for the year as stabilizing economic data, improving corporate profits and rising borrowing costs drove funds to bigger companies.


 



Market Returns (USD)

1-Week

Quarter-to-Date

Year-to-Date

1-Year

Global Equities

MSCI All Country World

0.9%

1.7%

19.3%

23.1%

S&P 500

0.2%

1.4%

15.9%

22.2%

Dow Jones Industrial Average

0.4%

2.1%

17.9%

29.5%

NASDAQ

0.2%

1.7%

23.8%

28.2%

Russell 2000

-0.5%

0.8%

11.9%

25.3%

MSCI EAFE

1.6%

1.6%

21.8%

24.4%

MSCI Emerging Markets

2.1%

4.1%

33.0%

29.3%

Hard Assets

MSCI US REIT

1.7%

2.0%

4.7%

5.3%

Alerlan MLP

-1.5%

-0.2%

-5.9%

-2.4%

Bloomberg Commodity Index

2.4%

1.7%

-1.2%

0.3%

Fixed Income

BofA Merrill Lynch Municipals 1-10 Year A-AAA 

0.2%

0.2%

3.3%

1.4%

Bloomberg Barclays Intermediate Government/Credit

0.3%

0.2%

2.6%

0.7%

Bloomberg Barclays High Yield Bond

0.0%

0.2%

7.2%

8.6%

JPMorgan GBI Emerging Markets Global Diversified

0.9%

-0.1%

14.2%

8.8%

Market Levels

Friday

Week Ago

Year End

Year Ago

S&P 500

2,553.17

2,549.33

2,238.83

2,132.55

Dow Jones Industrial Average

22,871.72

22,773.67

19,762.60

18,098.94

10-Year U.S. Treasury Yield (Constant Maturity)

2.28%

2.37%

2.45%

1.75%

Gold ($/oz)

$1,303.82

$1,276.68

$1,147.50

$1,258.09

Crude Oil ($/barrel)

$51.45

$49.29

$57.05

$53.97

U.S. Dollar / Euro ($/)

1.18

1.17

1.05

1.11

U.S Dollar / British Pound ($/£)

1.33

1.31

1.23

1.23

Japanese Yen / U.S. Dollar (¥/$)

111.82

112.65

116.96

103.71