October 2019 Monthly Market Review
Equity markets continued to climb in October, with broad-based gains across most regions and sectors. The S&P 500 hit another all-time high amid positive corporate earnings trends and another policy rate cut by the Fed. In a reversal from the previous month, domestic growth stocks regained market leadership and have sharply outpaced value stocks over the year to date period. The U.S. dollar fell broadly against most currencies, providing a tailwind for non-U.S. investments. Amid the positive gains there were a few notable areas of weakness, including natural resource stocks, master limited partnerships (MLPs), U.K. stocks, and longer maturity bonds.
The Federal Reserve cut rates by 25 bps on October 30th, a significant factor that caused front-end yields to fall and fostered demand for risk assets. Another source of downward pressure on front-end yields was the Fed’s announcement that it would begin purchasing $60 billion in T-bills each month until at least the second quarter of 2020. Both of these actions helped normalize the inversion of the curve. The Treasury curve steepened in this environment, with falling yields from the 3-month tenor to the 5-year tenor. However, yields at the long end rose.
While broader equity markets rallied, natural resource equities posted negative returns on weak earnings reports, particularly as large integrated oil companies faced headwinds, including a 8.5% drop in Brent crude prices, lower natural gas prices, and slowing demand growth due to a decelerating global economy (notably China). During the month, negative sentiment toward the energy complex spilled over to the MLP space, prompting investors to rotate to other sectors.
Yet another Brexit deadline passed with no resolution. Prime Minister Boris Johnson did not get the support necessary to fast-track his deal through Parliament in time for the month-end deadline. The European Union agreed to extend the deadline again to January 31, 2020. In an effort to break the impasse, Parliament agreed to hold an early general election on December 12th. By going to the polls, Johnson is hoping to gain a majority for his Conservative Party. While uncertainty persists, the U.K. pound rallied 5% relative to the U.S. dollar as the risk of a no-deal Brexit abated. U.K. equities did not enjoy the same rally, as the FTSE 100 declined 1.9%.
Across credit and event-driven hedge funds, PG&E was one of the most widely held names and it was a drag on results for many funds in the month. PG&E experienced two major events in October. A California judge ended the company’s exclusivity period, allowing creditors to propose an alternative restructuring plan. In addition, a large wildfire, the “Kincade Fire,” started in late October, and early indications were that PG&E’s equipment may have been the cause. These factors led to a sell-off in PG&E’s equity of nearly 40% in October, bringing the year-to-date decline to almost 75%. PG&E’s bonds also traded down. However, the bonds recovered a large portion of their losses as the fire came under control in the last few days of the month, limiting losses for debt-focused investors.