October 2019
September Ends Positively, but Recession Fears and Market Declines Arise

While October greeted investors with heightened recession fears and stock market declines, the month of September ended with positive returns across all risk assets, with only bonds in the red.

  • U.S. large cap value led equity markets, returning over 3.7%. International developed stocks returned nearly 2.9%, outperforming U.S. large caps, which returned nearly 1.9%.
  • U.S. mid- and small-cap stocks outperformed large caps, returning 3.1% and 3.3% respectively.
  • While U.S. Treasury yields began to fall mid-month, they ended the month notably higher, driving a loss of just over 0.5% for the U.S. aggregate bond index.

Global infrastructure: Compelling yield, reasonable price

Source: Bloomberg, as of 9/30/19.

Despite delivering one of the highest year-to-date returns of any equity segment, global infrastructure, as defined by the DJ Brookfield Global Infrastructure Composite Index, saw nearly double the yield of the S&P 500 at a lower price.


Only bonds were negative for the month of September—all other asset classes posted positive returns.

Returns of various common market segments

Source: Bloomberg

Could U.S. Treasury Yields Rise?

The answer for the first half of September was a resounding yes. Treasuries sold off dramatically, and the yield on the 10-year Treasury rose nearly 50 basis points (bps) in less than two weeks. But increasing recession fears, punctuated by a weak U.S. ISM Manufacturing Report on October 1 of 47.8 (below 50 indicates economic contraction) has erased roughly half of that increase. That Treasury yields fell as the odds of economic weakness appear to rise seems par for the course. But investors should be wary of bond market complacency, even if they are firmly in the camp of expecting a weaker U.S. economy. Witness the recent behavior of the German Bund market.

A Look at the German Bund Market

German economic news has been bad. Germany’s Markit Manufacturing Index has been below 50 for quite a while, with its latest reading on October 1 of just 41.7—much worse than the U.S. German GDP actually shrunk 0.1% sequentially in Q2. German industrial production fell 4.2% year-over-year in September. With that backdrop, yields on the 10-year German Bund—wait for it—actually rose roughly 15bps from mid-August through the end of September, and were still on an upswing at the onset of October, even as U.S. yields retreated.

German Bund yields are still negative—and U.S. yields are really low—but that’s the point. They may be so low that even if the U.S. and the global economy weaken, yields could rise, particularly on the longer end of the yield curve. Recall that the average historical real yield on the U.S. 10-year Treasury is around 2.5%. With inflation projected to run 1.5-2% in the U.S., and struggling to get to 1% in Europe, 10-year yields of 4% in the U.S. and 3% in Germany would look “normal.” But let’s not get crazy. There’s still a ton of quantitative easing coming from global central banks. So how about half-way to normal—say 1-1.5% on the 10-year German Bund, and 2.5-3% on the 10-year U.S. Treasury? It may seem like a contrarian thought for the moment, but maybe the risk that interest rates may rise shouldn’t be easily dismissed.

Equity Perspectives
Slowing PMIs Highlight Growth Concerns

With year-to-date returns of over 20% through the first nine months of the year, the S&P 500 is off to one of the strongest starts to the year in over two decades. September saw a modest rebound after the pullback we witnessed in August. But scratch below the surface a bit, and concerns about growth are beginning to reappear. For multinational companies with foreign revenue, the strengthening dollar and the ongoing malaise over trade are the key culprits, and the effects are beginning to seep into key economic readings. A prime example is the recently released ISM Manufacturing Index (PMI) for September, which fell into contraction territory and came in at the lowest level since June 2009. Global manufacturing data also continues to weaken and is being led downward by especially poor readings from Germany.

We have previously highlighted the implications of slowing corporate earnings growth and will be watching carefully as we head into the upcoming earnings season. All this is to say that plenty of investors are beginning to wonder where growth will come from as we head into the home stretch of 2019.

Look for Companies with Resilient Cash Flows

One segment of the market that continues to stand out is infrastructure stocks. Infrastructure is well suited to potentially continue strong performance in a macro environment in which growth may be hard to come by. The key reason is the unique investment characteristics that infrastructure stocks tend to have. Infrastructure assets are typically large-scale, capital-intensive projects that provide essential services, often times with limited competition. These features enable the owners and operators of infrastructure assets to maintain pricing power and command long-dated revenue arrangements, which ultimately result in more stable cash flows.

One way to demonstrate this is to examine EBITDA growth of infrastructure stocks as compared to global stocks over the previous several years. In prior periods where EBITDA growth for global stocks was negative, infrastructure stocks—as tracked by the DJ Brookfield Global Infrastructure Index—provided positive growth. This becomes especially attractive when considering this EBITDA growth can be purchased at more reasonable valuations compared to the broad stock market—as shown in the Chart of the Month.

Source for data: Bloomberg.

Indices are unmanaged and one cannot invest directly in an index. Past performance does not guarantee future results.

This is not intended to be investment advice.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. Whether or not actual results and developments will conform to ProShare Advisors LLC's expectations and predictions, however, is subject to a number of risks and uncertainties, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and other world economic and political developments. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Investing involves risk, including the possible loss of principal. This information is not meant to be investment advice.

Bonds will decrease in value as interest rates rise. International investments may also involve risks from geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and economic or political instability. In emerging markets, many risks are heightened, and lower trading volumes may occur.

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