Monthly Market Report: OCTOBER 2019

Markets Shrug Off Late Cycle Risks

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP®

Developed Markets losing steam

Developed Markets Maintain Strong 2019

In the month of October, international developed stock markets gained 3.23%. The Japanese and Europe ex UK equity markets recorded strong returns of 4.85% and 3.35%, respectively. Canada and the U.S. lagged the broader markets. Even though trade frictions, recessionary concerns, and geopolitical risk were often at the forefront of investors’ minds in 2019, the US market and broader international developed markets are up 22.67% and 17.24% year to date, respectively. People who hold excessive amounts of cash may realize a large opportunity cost.

Volatility increasing in emerging market equities

Russian Equities Having Strong Year

Broader emerging markets rose 4.20% for the month. Russia and Brazil posted gains of 8.60% and 6.35%, respectively. Mexico lagged other markets in October, returning 3.53%. Emerging markets have posted a modest gain of 11.99% year to date, but still trade at attractive valuations relative to the U.S. market.  With CAPE ratios being inversely correlated with long-term future returns and the U.S. CAPE ratio currently at an elevated 29, investors should look to foreign markets.

Global Sector

Healthcare and Information Technology Outperform

Healthcare and information technology recorded gains of 5.15% and 4.16%, respectively. Energy and consumer staples lagged other sectors, posting returns of -1.18% and -0.49%, respectively. Much of this bull market’s return has been driven by technology and consumer discretionary companies. Investors should not extrapolate these returns, especially given the business cycle is in the late stages.

Domestic Equity Factors

Value underperforms Growth

In October, value underperformed growth in the large-cap and small-cap space. The YTD return differential is most pronounced in the large-cap space. Momentum recorded a gain of 3.51%. Over the past year, value has also underperformed growth.

Foreign Equity Factors

Value Outperforms in International Markets

In the international developed markets, value outperformed growth in the large-cap and small-cap space. Momentum recorded a modest gain of 2.59% while small-cap emerging market stocks returned 3.92%. Historically, different equity factors have their own periods of outperformance, usually in shorter time periods but sometimes lasting a decade. However, tilting portfolios to capture more of the value and size premium has historically compensated investors in the long run.

Liquidity Providers

Savers Face Even Lower Rates

In October, the Federal Reserve lowered its benchmark interest rate by a quarter of a point. The further decline in rates will affect savers and may push them to invest in riskier assets. With the yield curve being so low, investors may face a decline in purchasing power if inflation exceeds the interest rate. The CPI increased by 1.73% year over year through September.

Deflationary Hedges

Bonds Flat in October

The returns of deflationary hedges were mostly flat or negative for the month. Investment-grade corporate bonds and catastrophe bond returned 0.61% and 0.44%, respectively The Bloomberg Barclays U.S. Agg Bond Index was up 0.33%. Emerging market bonds are having a strong 2019, returning 12.50% year to date. Emerging market debt may warrant a higher portfolio allocation if developed market growth continues to slow and their high debt levels become burdensome.

Inflation Sensitive Investments

Gold Outperforming in 2019

Inflation-sensitive investment returns were mostly positive for the month. International real estate and commodities recorded gains of 4.08% and 2.02%, respectively. Gold bullion continued its strong 2019, posting a return of 1.73% in October. Over the past year, gold has outperformed the broader equity markets and every other major inflation-sensitive investment. Still favorable supply/demand dynamics and low historical valuations may provide further tailwinds for gold investors. Given its role as a hedge against late cycle risks and with real interest rates being low or negative, gold may receive more attention from other investors.

World Currencies

U.S. Dollar Mixed Versus Other Currencies

Over the past three months, the U.S. dollar appreciated against the Japanese Yen and Chinese Yuan. However, the U.S. dollar depreciated against the British pound and Australian dollar by 6.59% and 1.63%, respectively, over the past three months. For international equity investors, a weakening U.S. dollar will provide a tailwind to returns.

Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.


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