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November 2018
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National Non-Operating Observations
Recent months have shown the U.S. economy starting to diverge from a slowing global economic picture. Poor growth numbers in China, a budget dispute between Italy and the European Union, and growing trade tensions all have weighed on global economic growth—and this started to translate into the investment markets in October.
The U.S. economy remains solid and healthy. The GDP increased 3.5 percent in the third quarter and the PCE Index, a key inflation measure, held steady at 1.97 percent. October was a strong month with the creation of 250,000 new jobs and 3.7 percent unemployment, the lowest rate in 48 years. The robust labor market pushed wages up 3.1 percent compared to 12 months ago, the biggest year-over-year increase in average hourly earnings since the end of the recession in 2009.
The real story of October, however, was the poor investment markets performance. Stock markets across the globe were down dramatically, with emerging markets continuing to underperform relative to other developed economies. U.S. Treasury rates increased 0.19 percent for the month, raising borrowing costs and reducing the value of current bond holdings. Commodities also lost ground, as investors started to fret that China will reduce its demand for raw materials given its reduced growth trends.
†3Q 2018 Bureau of Economic Analysis "first" estimate
*60/40 Asset Allocation assumes 30% S&P 500, 20% MSCI World, 10% MSCI EM, 40% Barclays Agg.

October 2018
Month Over Month Change (bps)
Year Over Year Change (bps)

GDP Growth
Unemployment Rate
Personal Consumption Expenditures
30yr MMD
30yr Treasury
Monthly Return on 60/40 Asset Allocation*
Non-Operating Assets
Despite volatility in early 2018, U.S. markets had picked up in recent months, before another volatile month in October. The S&P 500 index decreased 6.9 percent last month—its worst month since September 2011—with several “blue chip” stocks such as IBM, Caterpillar, and Amazon down more than 20 percent. Stocks were buoyed for several quarters by strong earnings growth from U.S. companies, but this narrative has started to reverse. Some firms are reporting weaker performance and others are starting to see impacts from global trade tensions. The increase in bond market yields resulted in a sell-off in bonds, with the Barclays Agg Index down 0.8 percent, increasing its losses to 2.4 percent for the year.
World markets also had a difficult month, with the MSCI World Index down 7.4 percent and the MSCI Emerging Markets Index down 8.8 percent. Both indices are negative year-to-date, with the MSCI Emerging Markets Index down almost 17.5 percent, reflecting currency, leverage, and growth concerns in several countries. Concerns in the developed world include worries of a disorderly “Brexit” and the budget dispute between Italy and the European Union, which is raising new anxieties over the financial stability of Europe’s fourth largest economy.
Long Term
Last Twelve Months
Long Term
Last Twelve Months
Non-Operating Liabilities
Capital markets borrowing levels, as approximated here by the ’30-yr U.S. Treasury’ and ’30-yr MMD Index,’ are dependent upon macroeconomic conditions, including inflation expectations, GDP growth, and investment opportunities elsewhere in the market. The key measure to track is bond fund flows. Money moving into bond funds leads to more cash-chasing investment opportunities, boosting prices and reducing yields. Fund inflows generally are moderate and consistent over some time horizon; fund outflows typically are large and sudden, as external events affect investor sentiment, resulting in selling bonds at lower prices and driving yields up.
Despite positive net inflows throughout 2018, October saw drastic outflows of $4.6 billion and the base municipal rate (30-yr MMD) was up 0.19 percent to 3.38 percent. Similar dynamics affected the U.S. Treasury market, which was up 0.19 percent (ending at 3.39 percent), nearing its 12-month high. Outflows in October were comparable, though smaller than, previous periods of material change in investor sentiment and resulting rising rates, such as the 2016 presidential election and the 2013 “taper tantrum.” In both instances, rates eventually came back down. With the Federal Reserve continuing to signal near-term rate increases, however, rates likely will continue an upward trajectory for some time.
Long Term
Last Twelve Months
Long Term
Last Twelve Months
National Observations
National Observations
©2018 Kaufman, Hall & Associates, LLC
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