Key Market/Economic Observations

United States
Rotation in Market Leadership, but Will It Last? 

Economic uncertainty cast by trade tensions, coupled with a slowing global growth outlook, has pushed investors to favor high-growth and “bond proxy” stocks throughout the year. However, a sharp rotation to value-oriented stocks occurred in the first two weeks of September. In our view, the rotation has been a function of the market repricing overblown recession fears coupled with a snap back in U.S. interest rates. Furthermore, the move was largely driven by “deep value” stocks, not the traditional “value” companies that maintain a margin of safety, which makes us doubt the sustainability of the rotation. The forward price-to-earnings ratio of the S&P 500® is at nearly the same level as it was during the 2018 high, while next-12-month earnings-per-share estimates are at all-time highs. Therefore, we continue to see a path higher for equity markets; however, increased volatility is also expected at this later stage of the business cycle.

International Developed Markets
Nontraditional Monetary Policy Tools Leading to "Even Lower for Even Longer" Realm

Developed markets rebounded in September, with support from easing trade tensions and rising interest rates. Unlike the United States, where Information Technology is the largest large-cap sector, most developed markets are led by Financials, which is more sensitive to interest rates. The European Central Bank cut its policy rate deeper into negative territory in September, despite policymaker warnings that negative interest rate policies are not enough to stimulate those slowing economies. Furthermore, reducing already low interest rates comes with the added risk of creating pockets of excess that could eventually hinder, rather than boost, longterm growth.

Emerging Markets
Global Tailwinds Return as China Readies for Anniversary Celebrations

For the second month this year, the MSCI Emerging Markets (EM) Index is set to outpace the S&P 500. Leadership from the Financials sector reasserted itself this month, which has been a detractor for most of the year. A confluence of macro tailwinds pushing global interest rates higher, combined with improving country-specific conditions, were net positives for EMs in September. We continue to monitor the protest situation in Hong Kong, softening economic data and further monetary stimulus from the central bank.

Commodities
Volatile Month in Oil Markets as Geopolitical Risks Return

Commodities had a volatile month, as the price of oil had its largest one-day dollar increase ever due to attacks on Saudi Arabia facilities that equate to 50% of Saudi oil production. However, prices gave back nearly that entire move in the following week as Saudi officials reassured markets that production could be restored by the end of the month. Agriculture prices also had a strong month as coffee prices rallied on supply imbalances, and the swine flu devastating Chinese pork production continues to have a significant impact on livestock prices.

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