Market Update - October 4, 2017Submitted by Jodi Vleck , Beta Wealth Group on October 4th, 2017
For the week ended September 29, most major U.S. indices set new highs capping off what is usually a seasonally weak month for returns, with small-caps outperforming large-caps by a wide margin. Driving this rally was the mid-week tax reform announcement which was received positively by the market, although the path to implementing meaningful tax reform is still a long way ahead. From a sector standpoint, we have witnessed a recent change in leadership, with the much beleaguered energy sector recently leading the way driven by gains in crude prices, and financials regaining momentum in the face of rising rates, and previously outperforming sectors like utilities lagging in anticipation of future rate increases. On the economic front, a small upward revision in the last quarter's GDP print and strong manufacturing numbers were offset by weaker-than-expected housing data and a modest weather-induced tick up in jobless claims.
Foreign stocks in developed markets such as Japan, U.K. and the rest of Continental Europe rose in local currency terms, but the negative influence of a stronger dollar, which rose 1% for the week, reduced the impact of these gains. In constant currency terms, weekly returns in Europe largely tracked those in the U.S., with broad relief over the results of the recent elections in Germany. In contrast with the removal of fiscal stimulus in the US and Europe, the Japanese central bank continues to purchase government bonds thus keeping JGB yields near zero, in a continuation of current policy. Emerging market stocks experienced negative returns last week, with most of the BRICs losing ground except for Russia, where returns were helped by a recovery in crude prices.
U.S. bonds lost ground for the week as interest rates ticked higher, due to hopes for potential growth induced by tax reform and a Federal Reserve committed to raising rates. Foreign developed market bonds fared similarly to U.S. debt in local currency terms, but gains were moderated by strength in the dollar. Similarly, USD-denominated emerging market bonds were flat while EM local currency debt fared worse losing 2% for the week.
Real estate returns in the U.S. were mixed, with strength in the more cyclical lodging Real Estate Investment Trusts (REITs), while Foreign REITs were negatively affected by a stronger dollar thus lagging US REITs. Commodity indices ended slightly higher for the week despite the stronger dollar, which tends to have an inverse correlation with crude prices which gained 2% last week.