Leaving a volatile second quarter behind, investor sentiment during the third quarter turned to “risk on”. A decision by the Federal Reserve to maintain the 0.25% – 0.50% range for the overnight rate drove the equity markets higher. Emerging markets outperformed developed markets as the dollar weakened against other major currencies, including the euro and yen.

The S&P 500 index ended the quarter up 3.9%, with dividend-oriented and other defensive sectors lagging economically sensitive sectors. The financial sector was the second best performing sector for the quarter, behind technology.

The international equity market, measured by the MSCI ACWI ex US index, was up 6.9%, and emerging markets measured by the MSCI EM index, was up 9.0%. During the quarter, the Bank of Japan (“BOJ”) shifted its monetary policy slightly in an effort to steepen the yield curve, but it did maintain its ¥80 trillion a year asset purchase program, which bolstered returns.

The yield on the 10-year U.S. Treasury rose 0.11%, ending at 1.60%.  While yields across all maturities increased during the quarter, corporate spreads tightened, leading corporate bonds to outperform. The high yield bond index increased by 5.6% during the quarter, while the Treasury bond index was down -0.3%.

The Federal Reserve made no change to its monetary policy during the third quarter.  The unemployment rate increased to 5.0% amid a continued increase in the labor force participation rate. While an increase in the labor force participation rate is a positive sign for the economy, it remains near multi-decade lows at 62.9%, as of the end of the quarter.

Headline inflation, which measures total inflation within an economy, including commodities such as food and energy, increased during the quarter to an annual rate of 1.5%.  Core inflation, which excludes food and energy, also increased to an annual rate of 2.2%.