November 2019 Market Commentary
In November, global equity markets rallied for the third month in a row. Within the U.S., small cap outperformed large cap, rising +4.1% versus +3.6%. U.S. equity volatility, as measured by the VIX Index, declined -4.5% to 12.6 – this level is substantially below its long term average of 19.2. Abroad, developed stocks outperformed emerging markets, rising +2.1% versus +0.6%.
The USD rose +1.1% during the month, driven by positive economic data at the beginning of the month. U.S. non-farm payrolls beat expectations, with a reading of 128k versus the 85k estimate. U.S. ISM non-manufacturing data surpassed estimates with a reading of 54.7 versus 53.5. The strong U.S. economic data led the Euro to decline -1.2% against the USD. The new ECB president Christine Lagarde stated that monetary policy will undergo “a strategic review”.
The RMB ended the month flat against the USD; however the USD/RMB dipped below 7.0 for the first time in several months. This was driven by an improved sentiment on trade tensions, however this quickly reversed after President Trump disagreed with a report that the U.S. was willing to roll-back tariffs. The month ended with the U.S. signing legislation that allows for sanctions on Chinese and Hong Kong officials responsible for human rights abuse. China warned of “strong counter measures” and increased uncertainty around a temporary trade deal.
The U.S. yield curve seesawed throughout November; the ten-year yield ended the month up eight basis points. The ten-year treasury yield rallied at the beginning of the month as trade tensions receded and stronger than expected economic data prevailed. However, the risk-on mood was dampened by President Trump threatening a tariff increase. The outlook worsened after economic data globally disappointed during the back half of the month.
The price of crude oil rose +1.8%. Crude oil was supported by strong activity data from the U.S. and China manufacturing PMI beating expectations – both factors strengthening the outlook for global demand. However, the positive outlook was tempered by an EIA report showing a much smaller increase in U.S. crude stock compared to a previously released report by the API national trade association.
Short-Term Market Outlook
Our proprietary leading economic indicator declined month-over-month and remains in negative territory. This was driven by a decline in global trade.
QS Leading Economic Indicator
Our outlook for U.S. stocks outperforming investment grade bonds remains in positive territory, though the strength of the signal declined since last month. The minor decline in the strength of the signal was driven by the recent rise in the ten-year treasury yield, which supports bonds over stocks.
In U.S. fixed income, we forecast that high yield will perform similarly to investment grade bonds over the near term. Within the model, the modest impact of the increase in the spread differential between high yield and investment grade has been offset by a decline in equity volatility.
We believe that U.S. stocks are positioned to underperform versus their international-developed market counterparts. This view is supported by valuation, which compares the forward price to earnings ratio in the U.S. versus their international counterparts. Options market data also shows greater demand for price protection in the U.S. versus international-developed markets. The option market data supporting international-developed markets is at the strongest level in almost three years.
European bonds are forecasted to marginally outperform European stocks in our model, a change compared to last month. The change in view is supported by a rise in European bond yields and a decline in the European Leading Economic Indicator. Valuation, as measured by comparing European equities earnings yield to the ten-year government yield continues to support stocks.
Asset Class Preferences
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-18957 (December 2019)