This Week in Focus - 29 Oct. 2016
Market Snapshot
Markets reversed from last week’s limited recovery, moving into deeper negative territory as a flight to quality stocks intensifies surrounding anxieties over a hawkish monetary policy narrative.
This week’s selloff in the United States focused primarily on small-cap and growth stocks, as well as interest-rate sensitive sectors, with limited downwards pressure applied to value-orientated and bluechip companies. The S&P 500 Index fell by 14.75 points during the period, roughly 0.70%, with pressure confined mostly to Real Estate, Health Care, and Consumer Discretionary Sectors, with a decline of 3.4%, 2.8%, and 1.9% respectively.
REITs (Real Estate Investment Trusts) encountered particular stress due to volatility in fixed-income markets that these types of yield driven, investment vehicles have been forced to track. Yield-driven investors squeezed to find higher returns have been forced to evaluate opportunities in equity markets, with many of these REITs treated in a fashion similar to bonds. Although the sector launched a minor recovery on Friday following stronger-than-expected GDP reports (Forecast: 2.5% vs. Actual: 2.9%), we expect increased pressure to be placed on this sector as an intensified hawkish narrative over monetary policy and higher rate forecasts follows an improved image of the US economy.
Another theme that characterized equity markets this week was the relative strength found in quality, value-oriented stocks, evident from the performance discrepancy between the Dow Jones Industrial Average and its composite counterparts. While the NASDAQ Composite and Russell 2000 Small-cap Index fell by 1.28% and 2.43% respectively during the period, the Dow Jones Industrial Average was largely insulated from the surrounding bearish pressure, inching 9 basis points higher on the week. As conservative investors reevaluate their positions on particular asset classes, risk-off market participants may swing more towards value, large-cap equities over safer fixed-income alternatives as low-yields and unclear future monetary policy threaten bond holdings. If general market sentiment remains positive and modest growth continues on a consistent track, investors should eye further inflows into quality companies as instability in fixed-income markets forces investors to place their cash elsewhere. However, the journal remains consistent with its view that further downwards movement in equity markets may be on the horizon depending upon how fundamental variables change in response to evolving monetary policy. Once markets have weathered the current instability and volatility, the quality-option may be preferable when compared to equity sectors and asset classes compromised by a changing economic environment.
Foreign equities fared better this week as European stocks encountered less volatility and downwards pressure, holding current valuations even off the backs of consecutive week-over-week rallies. The German DAX 30 slided an insignificant 14 basis points while the Euro Stoxx 50 ended flat for the session. During the week, a breadth of industrial data was released for numerous Eurozone countries that pointed to large recoveries in manufacturing inflation and employment. The recovery was shared relatively evenly amongst major European countries, with a particular surprise in the French manufacturing sector. Although the recent news may point to the increased effectiveness of easing monetary policy environment, more data will be needed to gauge the still uncertain prospects of European manufacturing in a world with declining international trade and increasingly populist rhetoric.
Markets reversed from last week’s limited recovery, moving into deeper negative territory as a flight to quality stocks intensifies surrounding anxieties over a hawkish monetary policy narrative.
This week’s selloff in the United States focused primarily on small-cap and growth stocks, as well as interest-rate sensitive sectors, with limited downwards pressure applied to value-orientated and bluechip companies. The S&P 500 Index fell by 14.75 points during the period, roughly 0.70%, with pressure confined mostly to Real Estate, Health Care, and Consumer Discretionary Sectors, with a decline of 3.4%, 2.8%, and 1.9% respectively.
REITs (Real Estate Investment Trusts) encountered particular stress due to volatility in fixed-income markets that these types of yield driven, investment vehicles have been forced to track. Yield-driven investors squeezed to find higher returns have been forced to evaluate opportunities in equity markets, with many of these REITs treated in a fashion similar to bonds. Although the sector launched a minor recovery on Friday following stronger-than-expected GDP reports (Forecast: 2.5% vs. Actual: 2.9%), we expect increased pressure to be placed on this sector as an intensified hawkish narrative over monetary policy and higher rate forecasts follows an improved image of the US economy.
Another theme that characterized equity markets this week was the relative strength found in quality, value-oriented stocks, evident from the performance discrepancy between the Dow Jones Industrial Average and its composite counterparts. While the NASDAQ Composite and Russell 2000 Small-cap Index fell by 1.28% and 2.43% respectively during the period, the Dow Jones Industrial Average was largely insulated from the surrounding bearish pressure, inching 9 basis points higher on the week. As conservative investors reevaluate their positions on particular asset classes, risk-off market participants may swing more towards value, large-cap equities over safer fixed-income alternatives as low-yields and unclear future monetary policy threaten bond holdings. If general market sentiment remains positive and modest growth continues on a consistent track, investors should eye further inflows into quality companies as instability in fixed-income markets forces investors to place their cash elsewhere. However, the journal remains consistent with its view that further downwards movement in equity markets may be on the horizon depending upon how fundamental variables change in response to evolving monetary policy. Once markets have weathered the current instability and volatility, the quality-option may be preferable when compared to equity sectors and asset classes compromised by a changing economic environment.
Foreign equities fared better this week as European stocks encountered less volatility and downwards pressure, holding current valuations even off the backs of consecutive week-over-week rallies. The German DAX 30 slided an insignificant 14 basis points while the Euro Stoxx 50 ended flat for the session. During the week, a breadth of industrial data was released for numerous Eurozone countries that pointed to large recoveries in manufacturing inflation and employment. The recovery was shared relatively evenly amongst major European countries, with a particular surprise in the French manufacturing sector. Although the recent news may point to the increased effectiveness of easing monetary policy environment, more data will be needed to gauge the still uncertain prospects of European manufacturing in a world with declining international trade and increasingly populist rhetoric.
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