September 2020 Market Commentary
After strongly rebounding since the March lows, global equities fell in September. This was driven by a rise in COVID-19 cases, delays regarding additional fiscal-stimulus within the U.S., and rising political uncertainty with the upcoming U.S. presidential election. Within the U.S., large caps and small caps struggled, returning -3.8% and -3.3%, respectively. U.S. equity volatility, as measured by the VIX Index, remained elevated with a reading of 26.4 at month end. Abroad, international developed stocks outperformed emerging markets, returning -0.9% versus -1.6%.
The USD rose +1.4% after several months of weakness. The currency benefitted from the broader “risk off” sentiment which saw U.S. large cap equities fall more than -10% from its high point earlier in the month. During the September 16th FOMC meeting, the Fed provided forward guidance that it would not hike interest rates for at least three years. Surprisingly, this had little effect on the USD. Economic data continued to improve over the month, including Retail Sales and Industrial Production.
The U.S. ten-year yield declined two basis points and ended the month at 0.68%. The MOVE index, which measures U.S. treasury volatility, closed the month at its lowest level in several years. The U.S. ten-year inflation breakeven rate, which is a proxy for inflation expectations, fell seventeen basis points and finished the month at 1.63%. Investors appeared to lose confidence in the Fed’s ability to reach a 2% average inflation target.
The price of crude oil declined -5.6% as concerns around a second wave of COVID-19 were brought to light. Crude oil was largely affected by Saudi Arabia’s announcement to markedly cut its price and Libya began to export the commodity again. In support of crude oil prices, the EIA reported that inventories fell by 4.4m barrels.
Gold prices declined -4.2% as the surging USD created headwinds for the commodity. Gold prices rose on the run up to the FOMC meeting, however the lack of reference to additional easing hurt gold. Additionally, on September 21st, gold had its worst one-day performance for the month, as the USD appreciated on the back of risk off sentiment.
Short-Term Market Outlook
Our proprietary leading economic indicator continues to stand in strong positive territory. This is driven by strong manufacturing data and a drop-in unemployment claims.
QS Leading Economic Indicator
Our tactical stock-bond model continues to favor U.S. stocks versus investment grade bonds. The valuation factor, which compares the earnings yield of the S&P 500 relative to the ten-year treasury yield, continues to strongly favor U.S. stocks. Additionally, the improvement in the QS leading economic indicator also drove the model’s preference.
In U.S. fixed income, we forecast that investment grade bonds will outperform high yield, a change in view compared to last month. This is driven by the widening spread between the two asset classes.
We believe that U.S. stocks are positioned to outperform versus their international-developed market counterparts. Yield curves in other developed markets are flattening at a faster rate than in the U.S., which we interpret as a sign of lower economic prospects abroad and supports U.S. equities. Equity price momentum also prefers U.S. stocks, but the strength of this factor has declined.
European stocks are forecasted to outperform European bonds in our model; the strength of the signal has declined since last month. The decline in the signal is driven by a drop in European Leading Economic Indicators.
Asset Class Preferences are based on QS Investors proprietary quantitative factor models. These rules-based financial models use a combination of indicators that analyze asset valuations, investor sentiment, and the broad economy.
*Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI EAFE Gross Total Return Local Index; U.S. Equities represented by the S&P 500 Total Return Index; U.S. Small Cap Equities represented by Russell 2000 Total Return Index; European Equities represented by MSCI Europe Gross Total Return Local Index; Italy Equities represented by MSCI Italy Index (MXIT Index); Spain Equities represented by MSCI Spain Index (MXES Index); Greece Equities represented by MSCI Greece Index (MXGR Index). China Equities represented by MSCI China Net Total Return Local Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; Emerging Market Fixed Income represented by J.P. Morgan EMBI Global Core USD Index.
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.
QSCR-19175 (October 2020)