Economic Backdrop

Measured expectations returned late in the quarter as geopolitical concerns widened and the anticipated end of “easy money” central bank policies in leading developed economies took hold. The U.S. Federal Open Market Committee announced continued asset purchase cuts, remaining on schedule to conclude its asset purchase program in October, while keeping rates near zero. Messaging emphasized the need to maintain loose policy amid persistent labor-market slack, which was reflected in plans to reinvest proceeds from maturing mortgage-backed securities (MBS), at least until rate hikes begin. The Bank of England’s (BoE) Monetary Policy Committee maintained benchmark interest rates and asset purchase levels, but Governor Mark Carney foreshadowed a gradual and limited cycle of rate increases following the Committee’s first dissenting votes in favor of an interest-rate increase in several years. The European Central Bank (ECB) cut interest rates in early September and announced an asset purchase program, providing a two-year horizon but no concrete target asset level. Finally, the Bank of Japan remained committed to closing the shortfall from its inflation target through continued low rates and asset purchases.

The expansion of U.S. manufacturing and services continued throughout the quarter, although at a progressively slower pace. Order volatility and industrial production figures were skewed by a high concentration of aircraft sales and automobile factory retooling.  However, the trends were largely positive, especially in light of heightened motor-vehicle sales. Unemployment fell throughout the quarter, finishing September at 5.9%, while mixed income and earnings information showed some improvement alongside an increase in consumer spending.  Home sales and prices declined as of the latest mid-quarter data, leaving much to be desired. Broader consumer and producer prices were soft, with the former remaining below the Federal Reserve’s (Fed) target.  Consumer sentiment and business optimism remained near recent recovery highs.

U.K. manufacturing growth started the quarter on strong footing and then steadily decelerated; services zigzagged, reporting impressive gains and then cooling off; construction activity expanded to multi-month highs by quarter end.  Retail sales improved, jumping during August from a flat start in July and finishing September on an optimistic note. Unemployment continued to decline, though earnings gains remained below target.  Consumer prices were mixed, while producer prices trended lower through August. House price gains were muted, indicating the BoE’s plan to moderate a potential housing bubble may be having an effect.

A strong start to the quarter for Eurozone manufacturing and services activity failed to keep pace, with declines in August and September leaving manufacturing just above the breakeven rate. Construction projects picked up based on July’s data, the most current data available. Inflation declined at the consumer level, and price pressures were biased to the downside at the producer level. The Euro area unemployment rate remained unchanged at 11.5% throughout the quarter, and sentiment deteriorated, with late-quarter reports hitting multi-month lows in both consumer and business surveys.  Retail sales stumbled early in the quarter and then recovered by August.

Market Impact

Fixed-income markets clawed back last quarter’s gains during an adjustment period in the third quarter, as the impending conclusion to central bank asset purchases and inception of an anticipated interest-rate increase cycle approached in several major economies.  The Barclays Global Aggregate Index returned -3.14%, more than offsetting second-quarter performance. U.S. Treasuries performed well relative to other asset class segments, owing to U.S. dollar strength and their perceived safe-haven status during a quarter marked by rising volatility. The dollar also supported U.S. mortgage- and asset-backed securities, which remained above breakeven, while investment grade turned slightly negative. U.S. high yield and TIPS declined, although they still outpaced global credit and governments.

Equity markets also retreated during the third quarter; returns were negative across all sectors of the MSCI All Country (AC) World Index besides healthcare.  Energy, last quarter’s leader, rotated to the rear on deeply unfavorable performance amid plunging crude oil prices. Regionally, the Middle East (Egypt, Qatar) and Southeast Asia (Thailand, Philippines, Indonesia) delivered pockets of opportunity in an otherwise unimpressive to negative period. Europe, both core (Germany, Austria) and periphery (Portugal, Greece), represented the most significant negative weight on global equity performance during the quarter.

Third Quarter Index Data

  • The Dow Jones Industrial Average Index returned 1.87%.
  • The S&P 500 Index gained 1.13%.
  • The NASDAQ Composite Index returned 2.24%.
  • The MSCI AC World Index, used to gauge global equity performance, decreased by 2.31%.
  • The Barclays Global Aggregate Index, which represents global bond markets, fell by 3.14%.
  • The Chicago Board Options Exchange Volatility Index, a measure of implied volatility in the S&P 500 Index that is also known as the “fear index,” increased in the quarter as a whole, moving from 11.57 to 16.31.
  • WTI Cushing crude oil prices, a key indicator of movements in the oil market, moved from $105.37 a barrel at the end of June to $91.16 on the last day in September.
  • The U.S. dollar strengthened against the euro, sterling and yen. The U.S. dollar ended September at $1.26 against the euro, $1.62 versus sterling and at 109.70 yen.


This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the Funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

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