Market IQ: Review and Outlook on the Markets

Insights

Market IQ: Review and Outlook on the Markets

DOUG SUE
Multi-Asset Strategist

OCTOBER 01, 2018


Market Review

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. 

[1] 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. Source: Bloomberg*

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.

IMPORTANT INFORMATION
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.


*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)