September – October 2018

U.S. Economic and Market Highlights

  • The year-over-year reading for Core Personal Consumption Expenditure (PCE) rose to 2.0%. This is the Fed’s preferred inflation measure and is right on target.
  • However, given that U.S. GDP growth rising above a 3.5% annualized rate in the third quarter the expectation is for inflation to rise above the Fed’s target rate.
  • Rising wages could add upward pressure on inflation, which will give the Fed further support to continue raising interest rates. Average hourly earnings rose 2.8% year-over-year as of September 30.
  • Inflationary momentum will be closely watched by the Fed, and investors, as an important indicator of near-term, economic growth trends. In question is whether consumer demands and economic growth will drive prices higher or if growth will stall and indicate an economic slow-down, or recession.
  • In September, the U.S. stock market gained to record highs for a second consecutive month. Small-cap U.S. stocks outperformed other indices. While the Emerging Market indices fell in September amid concerns about weakening currencies and high levels of dollar denominated debt in a few countries.
  • October was a different story, stock markets declined in the month, bringing index averages to slightly positive year-to-date, while experiencing significantly more than average volatility.
  • A primary bearers of the correction was the previously high-flying technology and consumer discretionary sectors.
  • The higher growth rates from the previous quarters and the Fed’s indication of higher interest rates to come prompted a significant rise in (longer-term) U.S. Treasury bond yields. Yields on the benchmark 10-year Treasury bond climbed from around 3.0% to 3.23%, marking their highest levels since May 2011.
  • As rates rise, market prices on existing bonds are negatively impacted. The result is that U.S. Treasuries, agencies, investment-grade corporates, and emerging market bonds have all had negative 12-month returns. (High yield and municipal bonds were the exceptions with positive 12-month returns.)
  • Additional fervor for the stock market sell-off was the forecast for weaker global growth from the IMF, and continued trade tensions between the U.S. and China.
  • But third quarter earnings reports are showing renewed focus on strong corporate earnings, especially at the banks.
  • The increased volatility in the stock market in October created a temporary rally in safe-haven assets including gold and U.S. Treasury bonds, with rates on the longer-term bonds coming down off the recent highs.
  • One weak economic trend that has continued for the last six months is the U.S. housing market whose sales declined again in September, in part due to higher mortgage rates.

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The above was prepared for informational purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security/instrument or to participate in any trading strategy. Past performance is not indicative of future results.