September 2019 Market Commentary
Global equity markets rebounded in September - Japanese equities returned +6.1% and was the leading performer out of the major global equity regions. Within the U.S., small cap outperformed large cap, rising +2.1% versus +1.9%. U.S. equity volatility, as measured by the VIX index, declined -14.4% to 16.2. Abroad, developed outperformed emerging markets, rising +3.6% and +1.5%, respectively.
The Federal Reserve cut interest rates by twenty-five basis points for the second time this year. The Fed highlighted that the rate cut was conducted in light of risks to growth and the ongoing trade war with China. The yield curve steepened as the U.S. ten-year treasury yield rose 17 bps and finished the month at 1.7%.
The European Central Bank responded to a weaker economic outlook by announcing additional stimulus and reducing its deposit rate to a record low of -0.5%¹. The ECB also announced it would restart quantitative easing and asset purchases until their stated inflation target is reached. Germany, Europe’s largest economy, continued to see deceleration in manufacturing, with its PMI falling to the lowest level since the global financial crisis¹. The EUR-USD broke below the 1.09 level, reaching a two-year low and closed the month down -0.8%.
The price of crude oil spiked in the middle of the month and rose +19.5% after drone attacks on Saudi Arabian oil facilities, which temporarily disabled roughly half of the kingdom’s production. However, prices retreated after the kingdom quickly restored the oil facilities and tensions between Iran and the U.S. eased. Crude oil finished the month down -1.9%.
Gold declined for the first time in five months, returning -3.8%. Gold’s price was volatile throughout the month, as it initially declined due to an improved global risk sentiment but then spiked following the attacks on Saudi Arabian oil facilties.
Source: Bloomberg and ¹Reuters.
Market Outlook for October
Our proprietary leading economic indicator strongly declined month-over-month and moved into negative territory. This was a result of a decline in global trade data, weakening manufacturing data and a decline in average hours worked.
QS Leading Economic Indicator
Despite these leading indicators, our outlook for U.S. stocks outperforming investment grade bonds remains in positive territory, however the strength of signal has moderated since last month. This is driven by the decline in our proprietary leading economic indicator. Valuation, as measured by comparing U.S. equities earnings yield to the ten-year treasury yield, continues to support U.S. stocks.
In U.S. fixed income, we forecast that high yield will outperform investment grade credit over the next month, a change versus last month’s view. This change in opinion is supported by the decline in equity volatility and narrowing in the spread differential between the two asset classes.
We believe that U.S. stocks are positioned to perform similarly to their international developed market counterparts. The valuation factor, which compares the forward earnings to price ratio in the U.S. versus their international counterparts and options market data supports international developed markets. 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 and supports U.S. equities.
European stocks are forecasted to outperform European bonds in our model, though the strength of the signal has moderated. Four of the six explanatory variables in our model point to this conclusion, including European stock price momentum, valuation, European government yields and our proprietary U.S. stock versus bond signal.
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-18902 (October 2019)