Market Update - September 5, 2017

For the week ended September 1, U.S. markets gained over 1% led by small caps, with the Russell 2000 index's weekly return accounting for more than half of its year-to-date gains, as did other major indices.  Dominating the news was Hurricane Harvey and the enormous damage it inflicted on Texas residents, which overshadowed other topics that were in the limelight before in August, including North Korea's saber rattling and talks of a looming government shutdown around raising the debt ceiling and funding construction of the border wall. By sector, health care bounced back sharply after biotech M&A news gained the spotlight, followed by technology, while bond-proxies such as telecom and utilities lagged. On the economic news front, upward revisions in Q2 GDP growth and expansionary manufacturing numbers overshadowed a disappointing jobs report.

In contrast with recent trends, foreign stocks underperformed the U.S., with both European and Japanese markets being negatively impacted by a stronger dollar. Recently in Europe, strength in the euro has raised concerns over earnings results in upcoming quarters, especially for export-oriented companies.  Emerging markets fared comparably with European markets, although returns were rather mixed across individual emerging market countries, with strength in Chinese markets and weakness in Mexican markets.

U.S. bonds were relatively flat for last week, when there were minor moves across the yield curve.  However, corporate credit outperformed government credit, with high yield bonds performing notably well.  Emerging market bonds outperformed developed market credits, which had to overcome headwinds due to strength in the dollar.  

Real estate equities gained across all major global markets, with Asian and European real estate markets outperforming the U.S., consistent with recent trends.  Domestically, lodging real estate investment trusts (REITs) experienced strength, while retail and residential REITs continued to stay weak. Commodities gained ground, with notable strength in energy and industrial/precious metals.

As we head deeper into September, which tends to exhibit seasonally high volatility, issues such as funding the government and raising the debt ceiling will likely dominate both political discussion and influence market direction.  While a politically-driven government shutdown is a higher probability scenario than a debt ceiling delay, a worst-case scenario could cause some erosion of investor confidence in U.S. government debt.