Commentaries

PMC Weekly Review - August 5, 2016

A Macro View – July Monthly Recap

Domestic equity markets were broadly higher in July, breaking out to the first new highs in more than a year. Although the last weeks of June brought heightened volatility due to the surprising outcome of the Brexit referendum, equities started off on a positive note in the second half of the year. Whereas economic growth globally remains muddled, better-than-expected earnings reports for the second quarter helped propel stock prices higher. Investors remain rightly concerned, however, about global growth prospects going forward. The initial financial market reaction to Brexit seems to have subsided, but real questions remain as to its substantive long-term impact, not only on Europe, but also on the world generally. Domestically, even though growth certainly has not approached levels of prior recoveries, the economy has chugged along, posting steady but unremarkable gains. The latest estimate of second quarter real gross domestic product (GDP) came in at +1.2%, above the +0.8% growth of the first quarter, but disappointing nonetheless. The July employment report, released today, was encouraging in that employers added 255,000 jobs during the month. In addition, the unemployment rate remained at 4.9%, and wages increased slightly, indicating that perhaps the U.S. economy can continue to generate slow but steady growth in a global environment in which it is anemic at best.

Against this backdrop, broad market indices were mostly higher. The S&P 500 advanced by +3.7%, and is now up +7.7% year-to-date. The Dow Jones Industrial Average (DJIA) also moved higher, posting a gain of 2.9%. The tech-heavy Nasdaq Composite Index was a big winner, gaining +6.7% in July. The Russell 2000 Index of small cap stocks outperformed the Russell 1000 Index of large cap stocks, with returns of +6.0% and +3.8%, respectively. Value stocks underperformed growth stocks. The top-performing sectors were information technology, materials, and health care, with returns of +7.9%, +5.1%, and +4.9%, respectively. Energy and consumer staples were the poorest performers, posting negative returns of -1.9% and -0.7%, respectively. Commodities were lower, declining -5.1%. REITs generated gains, advancing by +4.4%.

International equity markets were also universally higher, and many indices outperformed U.S. equity indices. The MSCI World ex-U.S. Index advanced by +5.0%. Emerging markets continued a solid run of positive returns, with the MSCI Emerging Markets Index gaining +5.0%. The MSCI EAFE Index, which measures performance in developed markets, tacked on +5.1%. Regionally, the Pacific ex-Japan region and Japan generated the best relative gains, advancing +7.0% and +6.5%, respectively. Eastern Europe and China were the poorest relative performers, gaining +2.6% and +3.5%, respectively.

Fixed income markets were generally higher, as investors continued to react to policymakers’ efforts to tackle the problem of lackluster global growth. Domestically, yields remained low throughout the month, and in other developed markets, such as Germany and Japan, negative interest rates on sovereign debt have become policy. Bond investors continue to handicap when the Federal Open Market Committee (FOMC) may next raise interest rates, with futures markets assigning an 18% chance of a hike at the September meeting, and a 37% probability for the December meeting. Within this environment, the 10-year U.S. Treasury yield ended the month at 1.46%, down three basis points from the 1.49% level of June 30. Performance of broad-based fixed income indices was, on balance, higher in July, with the Barclays U.S. Aggregate Bond Index advancing +0.6%. Global fixed income markets also marched higher, with the Barclays Global Aggregate ex-U.S. Index gaining +0.8%. Intermediate-term corporate bonds also rose, as the Barclays U.S. Corporate 5-10 Year Index gained +1.2%. The Barclays U.S. Corporate High Yield Index added +2.7%. Municipals were also modestly higher, gaining +0.1%.

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