October 2017

Financial Market Roundup

Produced by Fifth Third's Investment Management Group

Trends at a Glance

Global Trends

Central Bank Policy

Equity Performance

Interest Rates and Growth

Political and Regulatory Trends

Investment Trends

In the following piece, Fifth Third's Investment Management Group recaps the market and how it reacted to various events in the month of September. I hope you find this Financial Market Roundup helpful and informative.

Global Trends

Geopolitical tensions continued to heighten in September. U.S. President Donald Trump spoke to the United Nations about the threat of North Korea’s regime, warning that the U.S. would destroy North Korea if forced to defend itself or its allies. In Europe, Angela Merkel secured a fourth term as chancellor in September, though her center-right party’s lead in parliament fell and support for the far right surged.

Central Bank Policy

Global central banks continue to move towards removal of accommodation. The Federal Reserve announced that it will begin shrinking its balance sheet starting in October. Consensus expectations now also reflect a rate increase from the Federal Reserve in December. The European Central Bank continues to hold rates unchanged, with Euro strength another impediment to “liftoff” of short term rates. The Bank of Japan may need greater assurance that it is successfully boosting inflation as well as real growth.

Equity Performance

U.S. stocks hit all-time highs to close out the third quarter, with the S&P 500 bringing its year-to-date return above 14 percent and capping its eighth quarterly advance in a row. Small and mid-cap stocks outpaced large-cap, in a reversal of year-to-date trends. The Russell 2000 index ended the month at a new record. Like domestic stocks, international stocks are also making new all-time highs as global growth prospects improve.

Interest Rates and Growth

The yield on the 10-year Treasury surged higher to finish August at 2.33 percent, adding 21 basis points in the month. Inflation continues to be moderate and many high quality sovereign yields abroad continue to be negative; the combination of these factors acts as a weight upon yields. Gross domestic product rose at a 3.1 percent annualized rate in the second quarter, faster than previously estimated at 3.0 percent.

Political and Regulatory Trends

The President, along with GOP leadership, proposed a nine-page framework for tax reform late in the month that set the corporate tax rate at 20 percent, down from the current 35 percent rate. The framework for tax cuts came after the Senate was unable to pass a healthcare bill, as three Republicans opposed the proposal written by their peers, leaving Senate GOP leaders unlikely to reach a majority vote.

Investment Trends

The prospect for slow (and well-communicated) normalization of monetary policy being met with stimulative fiscal policy in the form of tax cuts supports the argument for continued economic expansion, potentially at a modestly accelerated pace. Impacts of destructive hurricanes in the southeast impacted economics in September and will likely distort data in the near-term. Natural disasters can create distortions in labor availability in construction and potentially impact inflation data.

Market commentary provided by Fifth Third Bank. Source of statistics is Bloomberg.com. Returns are calculated from market close on 9/1/17 through 9/30/17. This information is current as of the date of this letter and the opinions expressed are subject to change at any time, based on market and other conditions. This information is intended for educational purposes only and does not constitute the rendering of investment advice or specific recommendations on investment activities and trading. The mention of a specific security within this letter is not intended as a solicitation to buy or sell the specific security. Index performance shown within this letter is not representative of any Fifth Third managed account.

Investing involves risk, including the possible loss of principal invested. Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment loss. Past performance is no guarantee of future results.

Indexes are unmanaged, do not incur investment management fees, do not represent the performance of any particular investment, and may not be invested directly into by investors. Small company investing involves specific risks not necessarily encountered in large company investing such as increased volatility. Investments in foreign markets entail special risks such as currency, political, economic and market risks.

Consumer Price Index (CPI) - measures changes in the price level of a market basket of consumer goods and services purchased by households.

DJIA/DOW – the Dow Jones Industrial Average is a price weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

Fed – The Federal Reserve System (FRS) is the central bank of the United States and is commonly known as “The Fed”. It regulates the U.S. monetary and financial system. The Fed's mandate is to promote sustainable growth, high levels of employment, stability of prices to help preserve the purchasing power of the dollar and moderate long-term interest rates.

Federal Funds Rate (Fed Funds) – The interest rate at which depository institutions actively trade balances held at the Federal Reserve.

FOMC – The Federal Open Market Committee is the policy-making branch of the Federal Reserve that reviews economic and financial conditions and determines an appropriate stance of monetary policy by setting a target for the federal funds rate. GDP – Gross domestic product is the market value of the goods and services produced by labor and property located in the United States.

GDP – Gross domestic product is the market value of the goods and services produced by labor and property located in the United States.

Gold Index - is the U.S. dollar per Troy ounce.

MSCI EMF (Emerging Markets Free) Index – is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of June 2006 the MSCI Emerging Markets Index consisted of the following 25 emerging market country indices: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Pakistan, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.

MSCI US REIT Index – is a free float- adjusted market capitalization weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The index represents approximately 85% of the US REIT universe.

MSCI World Index – is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,Sweden, Switzerland, the United Kingdom, and the United States.

Oil ($ barrel)/WTI – Bloomberg USCRWTIC Index representing West Texas Intermediate (WTI) Cushing Crude Oil Spot Price.

Organization of Petroleum Exporting Countries (OPEC) - is a group consisting of 12 of the world's major oil-exporting nations. OPEC aims to manage the supply of oil in an effort to set the price of oil on the world market, in order to avoid fluctuations that might affect the economies of both producing and purchasing countries.

S&P 500 Index – The Standard and Poor’s 500 index is a capitalization weighted index of 500 benchmark stocks and is often used as a measure of the overall U.S. stock market.

US Treasury – A debt obligation backed by the U.S. government with a fixed interest rate and a maturity between one and 10 years.

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