September asset returns were largely representative of year-to-date trends: global stocks appreciated and global fixed income depreciated. Both global and U.S. equities were up 0.6%1 during the month. International-developed markets were up 1.5%, largely driven by exceptionally strong performance in Japan, which appreciated 5.7%. The surge in Japanese equities was large enough to erase that market’s year-to-date loss and brought the Nikkei to levels last seen in 1991.
The U.S. government announced a new round of tariffs on $200Bn of Chinese goods – the latest in a series of bi-lateral tariffs announcements started in March of this year. The impact on each region’s equity markets continued a familiar trend – Chinese equities were substantially worse off than stocks in the U.S. market (Chinese equities were down 1.6% in September and down 9.0% year-to-date). A variety of positive economic and macro data points provided support to U.S. equities, including below-average volatility, record-low jobless claims, strength in manufacturing data, and surging consumer confidence. The exception to U.S. stock gains came in small caps, which declined 2.4% in September. Small cap stocks have performed well year-to-date (+11.5%) – smaller U.S. companies tend to be less affected by trade war tensions and USD weakness given their domestic sales concentration.
Global fixed income yields rose during the reporting period, largely following the trend set by the U.S. ten year treasury, which reached an intra-month closing price of 3.10% – its highest daily close since May 17 earlier this year. As was widely expected, the U.S. Federal Reserve raised the target Fed funds rate by a quarter point, to 2.0-2.25%. As indicated by forward rate expectations, the market has priced in a fourth rate hike later this year.
 Unless otherwise noted, asset classes herein refer to the specific indexes referenced at the end of this commentary. All returns and levels are on the U.S. market close.
Short-Term Market Outlook
Our economic outlook remains in negative territory at the end of September and at a level similar to the end of August. The attribution of this outlook is also similar to a month ago: weakness in our measurement of global trade activity is driving this view, strengthened by a decline in building permits and somewhat moderated by strength in initial jobless claims.
QS Leading Economic Indicator
This assessment of leading indicators is subsequently the largest drag on our outlook of global stocks versus bonds, which only modestly favors equities. A rise in interest rates also contributed to our modest favoring of equities – when rates rise, borrowing costs increase, which typically erodes economic growth and stock market gains. Relative valuation between equities and fixed income, in addition to leverage growth in the economy, has provided consistent support to equities throughout the last year.
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.
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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; Chinese Equities represented by MSCI China Net Total Return USD 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; 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).
QSCR 18248 (October 2018)