Quarterly Market Review: Q3 2016

When Rising Unemployment Can Be a Good Thing

The Department of Labor released the latest “jobs report” last week, which highlights the number of new jobs created and the general unemployment rate. The figures were reported as being somewhat disappointing in that “only” 156,000 new non-farm payrolls were created in September. This figure was below expectations of 172,000 jobs created. When paired with the unemployment rate rising from 4.9% to 5.0%, you can understand the initial sense of disappointment. The general unease that remains over the vitality of the U.S. economy seems difficult to shake.

When I look at the data, however, I see some signs of improvement. First, the expected number of new jobs is a collective estimate derived from a number of economists. It is not a magic number or even necessarily a target – it’s just an estimate. Even though we didn’t hit that number, 156,000 new jobs created in a month is still good and demonstrates that the U.S. economy is continuing to expand, and that employers feel confident enough to continue adding to their payrolls.

Second, and perhaps seemingly contradictory, is that the unemployment rate rose to 5.0%. What can possibly be good about rising unemployment? You have to remember that the unemployment rate measures only the number of people out of work who are actively looking for work. Since the recession, millions of Americans stopped looking for work and were therefore not included in the unemployment figures. The rate of people looking for work is measured in the Labor Participation Rate calculated by the Department of Labor. The graph below shows that the tight labor market has started to encourage people to rejoin the work force and to begin seeking employment again.

Data source: Department of Labor

The rise in Labor Participation is not dramatic, but there is a gentle upward trend shown in the graph beginning about a year ago. This rise in labor reflects a degree of optimism, as more people are looking for work because more people are actually finding work. Rising unemployment is not usually a good thing, especially in a more robust economic environment, but it’s worth noting the potentially positive sign in the data. Not surprisingly, claims for unemployment benefits are currently at a 43-year low.

As we head into the holiday season, we can hope for positive economic signals such as continued job creation, wage growth and an increase in inflation. Wage growth is up 2.6% from a year ago, with the ideal rate between 3.5-4%. In the last month, average hourly earnings were up 0.3% in a month, however, which would get us up to 3.6% annually if the trend continues.

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review. Enjoy!

Data source: Trading Economics. 2016.

Market Summary Third Quarter 2016 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index), US Bond Market (Barclays US Aggregate Bond Index), and Global Bond ex US Market (Citigroup WGBI ex USA 1−30 Years [Hedged to USD]). The S&P data are provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2016, all rights reserved. MSCI data © MSCI 2016, all rights reserved. Barclays data provided by Barclays Bank PLC. Citigroup bond indices © 2016 by Citigroup.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q3 2016

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

Graph Source: MSCI ACWI Index. MSCI data © MSCI 2016, all rights reserved. It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio. Past performance is not a guarantee of future results.

World Asset Classes

Third Quarter 2016 Index Returns (%)

Looking at broad market indices, emerging markets outperformed all other equity markets during the quarter. The US equity market lagged developed markets outside the US. US real estate investment trusts (REITs) recorded negative absolute returns and lagged the US equity market.

The value effect was negative in the US and emerging markets but positive in developed markets outside the US. Small caps outperformed large caps in the US and in developed markets outside the US but underperformed in emerging markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Russell data © Russell Investment Group 1995–2016, all rights reserved. MSCI data © MSCI 2016, all rights reserved. Dow Jones data (formerly Dow Jones Wilshire) provided by Dow Jones Indexes. Barclays data provided by Barclays Bank PLC.

Real Estate Investment Trusts (REITs)

Third Quarter 2016 Index Returns

US REITs posted negative absolute performance for the quarter, lagging the broad equity market. REITs in developed markets recorded positive absolute returns but underperformed broad developed markets equity indices.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones US Select REIT Index data provided by Dow Jones ©. S&P Global ex US REIT Index data provided by Standard and Poor's Index Services Group © 2016.

Select Country Performance

Third Quarter 2016 Index Returns

Austria and Hong Kong recorded the highest country performance in developed markets, while Singapore and Denmark posted the lowest performance for the quarter. In emerging markets, Egypt and China were the top performers, while Turkey and the Philippines recorded the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), Russell 3000 Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2016, all rights reserved. Russell data © Russell Investment Group 1995–2016, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

Third Quarter 2016 Index Returns

Interest rates across the US fixed income markets generally increased during the third quarter. The yield on the 5-year Treasury note rose 13 basis points (bps) to end at 1.14%. The yield on the 10-year Treasury note increased 11 bps to 1.60%. The 30-year Treasury bond increased 2 bps to finish with a yield of 2.32%.

The yield on the 1-year Treasury bill rose 14 bps to 0.59%, and the 2-year Treasury note yield increased 19 bps to 0.77%. The yield on the 3-month Treasury bill increased 3 bps to 0.29%, while the 6-month Treasury bill increased 9 bps to 0.45%.

Short-term corporate bonds gained 0.32%. Intermediate-term corporates rose 0.89%, while long-term corporate bonds gained 2.56% (a).

Short-term municipal bonds returned -0.21%, while intermediate-term municipal bonds were unchanged. Revenue bonds slightly outperformed general obligation bonds (b).

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. a. Bloomberg Barclays US Corporate Bond Index. b. Bloomberg Barclays Municipal Bond Index. Yield curve data from Federal Reserve. State and local bonds are from the Bond Buyer Index, general obligation, 20 years to maturity, mixed quality. AAA-AA Corporates represent the Bank of America Merrill Lynch US Corporates, AA-AAA rated. A-BBB Corporates represent the Bank of America Merrill Lynch US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). Citigroup bond indices © 2016 by Citigroup. The BofA Merrill Lynch Indices are used with permission; © 2016 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a wholly owned subsidiary of Bank of America Corporation.

This report was prepared by Gregory Saliba.