Some have
been thinking that equity markets are running on empty with an economy that
cannot generate significant growth, but a review of sector, style, country and
bond returns for the month show a market where investors are still willing to take
risks. There is a clear focus on risk-on assets at the expense of rate
sensitive sectors. The key fourth quarter question is whether this will
continue in an environment that suggests the Fed is ready to act.
In the
style sectors, September returns were strongest in the emerging markets while
money seemed to be pulled from dividend yielding stocks. The sector that showed
the weakest potential performance based on moving averages and past momentum
was dividend yielding equities. Albeit no action from the Fed, there is the
belief that rates may be headed higher even if there are still risk opportunities
available. The push pull is between whether a higher discount rate will have
more impact than a possible upturn in the economy.
The major sector analysis confirms the move out from
higher yielding equities. Utilities and real estate shows the weakest moving
averages. Finance and real estate were the weakest sectors for the month. With
the growing problems of Deutsche Bank, there has been a closer look at all
names in the finance sector. Energy stocks made a significant comeback with the
rise in oil prices. Technology continues to be a strong performer for the year.
Country risk shows weak performance for Mexico, the
nation most likely to be affected by a trade war. Similar to the swings in the
peso, switches in US presidential election probabilities will drive this
market. Weaker EU countries are also an investor concern. There continues to be
have and have-not countries in the EU. Asian markets have shown stronger
performance in spite of trade issues and growing geopolitical risks with China.
The bond showed better performance in the riskier
credit and non-dollar sectors. This is consistent with the risk-taking behavior
in the equity markets. There seems to be greater caution at taking on more
duration risk at this time.
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