- US Economy
US economy grew at 1.3% YOY in Q2. Job markets continued improving and unemployment dropped to 4.9% though the labor force participation rate remained at 30-year low. Wage growth was moderate. The headline CPI inflation rate stayed at 1.1%. The Fed kept interest rate unchanged in the September meeting, but became more hawkish. Manufacturing and service sectors continued expanding, but corporate profits declined for five consecutive quarters from the recent peak. Consumer confidence remained high and housing sector continued recovering.
- Market Snapshot
The third quarter was mostly quiet and global equity markets rallied. The British Pound continued its slid to $1.22/pound after the Brexit referendum. Oil was traded round $50/barrel. Gold gave up some earlier gains, traded at $1257 /oz. US government bond yields moved higher from recent low as the Fed became more hawkish.
- Asset Class Performance
In the third quarter, equities and high yield bonds performed well, but the interest rate sensitive asset classes lagged. On the YTD basis, all asset classes generated positive returns. Gold and EM equities were among the best performers, gaining 23.8% and 17.2%, respectively. High yield bonds as well as long-term Treasuries gained significantly. Hedge fund returned 4.2% in aggregate. The financial sector(1.3%) and healthcare (1.3%) lagged the general market, while the utilities (15.9%) and energy (19.4%) led the sector performance.
- Equity Market
US equity valuation was not cheap by historical standard. The current PE rate of S&P 500 Index moved higher to 24.7, which was well above the historical average of 15.6. The Cyclically Adjusted PE Ratio (CAPE), coined by Professor Shiller from Yale, was 26.5.
- Fixed Income Market
Credit spreads tightened significantly from the recent highs. US HY bonds was traded at 493bps, and BBB at 184bps.
- Market Risk
Financial and market risks were muted as both the St. Louis Fed Financial Distress Index and VIX remained at moderate levels.
Global economic growth stayed at moderate levels. Inflation rates across the globe are muted as well. Japan still struggled with deflation. Central banks policies continued to be extremely accommodative. The Fed kept interest rate on hold in the September meeting, though three hawkish members voted against the decision.