Fixed Income Yields and Equity Prices Rose Prior to Strike on Oil Facility in Saudi Arabia
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 09/13/19. Rates and Economic Calendar Data from Bloomberg as of 09/13/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Stocks continued to climb higher posting their third consecutive weekly gain. In the U.S., the S&P 500 Index advanced to a level of 3007, representing a gain of 1.02%, while the Russell Midcap Index increased 1.08% last week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, outpaced it’s larger counterparts pushing forward 4.90%. Despite the strong showing, small-cap stocks are still slightly lagging year-to-date. On the international equities front, developed and emerging markets also gained momentum moving higher 1.99% and 1.91% respectively. Finally, the 10-year U.S. Treasury yield closed out the week at 1.90%, 35 basis points higher than the previous week’s close. Improved risk sentiment, and possibly anticipation of what the Federal Reserve may do (or not do) this week regarding interest rates, led to large outflows from fixed income mutual funds and ETFs sending prices lower and yields higher.
Amid the sell-off in bonds, we find a yield curve that is no longer inverted between the 2 year and 10 year U.S. Treasuries – the often quoted recession predictor relationship. In fact, as of Monday morning, there is roughly an 11 basis point spread between the 2 and 10 year U.S. Treasuries with the 30 year yielding over 2.3%. We believe that these moves may have been due to a realization that the Federal Reserve will likely not be cutting rates by 50 basis points later this week after the FOMC meeting. In addition, we contend that a 25 basis point cut is unnecessary due to the relative strength of the “slowing but growing” U.S. economy. We’ll have to wait and see what happens at the FOMC meeting later this week and how investors react to any action and/or rhetoric.
In other news, we wanted to touch on the attack this weekend on a Saudi Arabian oil facility which sent oil prices sharply higher. This oil facility supplies roughly 5% of global oil and while it may take some time for this particular facility to come back online, we believe there are enough alternative sources of supply across the globe (particularly in the U.S.) to help limit any sustained surge in oil prices.
It’s fair to say that the days of elevated market volatility are not behind us, and we continue to encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.
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