Spruce Index Returns November 2018

In the month of November global risk assets rebounded strongly as midterm election results came in about as expected, ending market uncertainty and Federal Reserve Chairman Jerome Powell stated interest rates are close to “neutral”, which traders believed signals the end of rate increases. Global equities gained +1.46% and the S&P 500 Index rose +2.04%. Healthcare rallied an incredible +8.08% as investors piled into defensive assets including Real Estate +5.48%, REITs +4.75% and Utilities +3.54%. Technology led U.S. sector declines with -1.96% followed by Energy at -1.56%.

Click here to view full Spruce Index Returns November 2018.

Core bonds gained on the month as the Barclays Aggregate increased +0.60%, but still remains -1.79% on the year. High Yield followed a poor October by losing another -0.86% in November, now down -2.45% in the quarter, and flat Year-To-Date at +0.06%. Municipal bonds gained +0.80% in November and are up +0.75% on the year. Overall, fixed income remains a drag for investors targeting 7% returns (5% Spending + 2% Inflation) with most bond total returns flat to down.

Overseas, gains were led by the Emerging Markets +4.12% with China +7.13%, Turkey +5.83% and Argentina +5.62%. Emerging Markets rallied early in the month based upon mid-term election results and large ETF inflows, and later in the month as the Trump administration appeared to soften on China. In contrast, Brazil declined -2.10% and Russia -1.16%. Developed countries in the EAFE Index saw a more modest gain of +1.01% as growth continues to slow in Europe.

In terms of factors, Dividend stocks performed well +4.96% in-line with higher yielding REITs and utilities, Value grew +2.54%, and Momentum appreciated +1.69%. Global Factors saw similar relative performances although the absolute returns were lower than the U.S.

The story of the month; however, was Brent Oil’s -22.54% November decline in the face of a slowdown in global growth, trade fears, and record energy production. The politics of oil are more complicated than ever following President Trump’s support of Saudi Arabia after the reported murder of reporter Jamal Khashoggi by Saudi Crown Prince Mohammed bin Salman (MBS). President Trump had been previously demanding lower oil prices which Saudi seemed to provide.

The ten-year Treasury yield, after peaking at 3.24% on the 4th, has since declined to just below 3%. Corporate credit spreads widened modestly to 2.40% for BBB credits. Bitcoin quietly lost -36.17% in the month and is now down -75% on the year.

In spite of the equity rally, the 2/10 yield curve, often a pre-cursor to recessions, declined to a razor thin 14.66 or 14 basis points. It started the year at a much healthier 77 basis points and has not been at this level since June 2007, i.e. just prior to the 2008 crisis. The 2/5 yield curve is already inverted at -0.559 as of December 3, 2018. Bonds and credit may be discounting the equity rally and signaling a slowdown ahead.

Financial conditions in the U.S. continue to slowly tighten, although they currently reflect normal conditions. Economic surprises are flat relative to expectation. In Asia ex-Japan financial conditions remain negative implying tighter conditions than pre-crisis levels. Emerging markets economic surprises remain negative relative to expectation. Historically, tightening AND slowing conditions are not positive for risk assets.

Overall, we appreciate the current equity rally but see worrisome signs in the bond and credit markets and expect outsized volatility to be with us for 2019.