PMC Weekly Review - July 1, 2016
Domestic equity markets were mixed in June, with volatile trading in the last five sessions roiling indices. Investors were primarily focused on the lead-up to, and aftermath of, the U.K.’s decision to exit the European Union (“Brexit”). The Brexit decision caught the market off guard, and although it will have minimal impact in the near future, markets do not like surprise or uncertainty. Other factors weighing on the market during the month were the Federal Open Market Committee’s (FOMC) decision to stand pat on interest rate policy. Committee members had been preparing the markets for the possibility of a rate hike, but May’s employment data and the specter of Brexit effectively served to scotch those plans, at least for the time being. Another contributing factor to the month’s volatility is the domestic political situation, in which neither presidential candidate has done much to excite voters. The latest estimate of first quarter real gross domestic product (GDP) came in at +1.1%, slightly ahead of the +1.0% consensus forecast, and also above the previous estimate of +0.8%.
Against this backdrop, broad market indices were modestly higher. The S&P 500 rose by +0.3%, and is now up +3.8% year-to-date. The Dow Jones Industrials (DJIA) also climbed, posting a gain of 1.0% for the month. The tech-heavy Nasdaq Composite Index slumped -2.1%, and finished the first half of the year down -2.7%. The Russell 2000 Index of small cap stocks slightly underperformed the Russell 1000 Index of large cap stocks. Value stocks outperformed growth stocks. In terms of sector performance, the top performers were telecommunications services, utilities, and consumer staples, with returns of +9.3%, +7.8% and +5.2%, respectively. Financials and information technology were the poorest performers, with returns of -3.2% and -2.8%, respectively. Commodities rallied during the month, jumping +4.1%. REITs surged +6.5% in June in the wake of lower interest rates.
International equity markets were mostly lower in June, but there were regional pockets of relatively positive performance. As in the U.S., investor focus centered on Brexit and global economic growth more generally. The MSCI World ex-U.S. Index declined by -3.0%, which is also how it ended the first six months of the year. Emerging markets were a bright spot, as commodities prices rebounded. The MSCI Emerging Markets Index rallied by +4.0%, and is now up +6.4% for the year to date. The MSCI EAFE Index, which measures developed markets performance, fell -3.4%. Regionally, Latin America and Asia posted the best relative performance, advancing +11.5% and +2.8%, respectively. Europe and Japan were the poorest relative performers, giving back -4.5% and -2.5%, respectively.
Fixed-income markets experienced generally rising prices and falling yields as investors reacted to several factors, including the FOMC’s decision not to raise rates, Brexit, and negative interest rates in countries like Germany and Japan. The yield curve continued to flatten, with demand for 10-year notes driving prices higher and yields lower, while at the same time short-term interest rates remained steady to slightly higher. Although the FOMC would prefer to begin interest rate policy normalization soon, it is likely to remain on hold, at least until September. The futures market is assigning only a 10% probability of a rate hike this year. Within this environment, the 10-year U.S. Treasury yield ended the month at 1.49%, down 34 basis points from 1.83% on May 31. Performance of broad-based fixed income indices was mostly higher in June, with the Barclays U.S. Aggregate Bond Index advancing a mere +0.03%. Global fixed income markets suffered steep losses, with the Barclays Global Aggregate ex-U.S. Index climbing +1.8%. Intermediate-term corporate bonds were lower, as the Barclays U.S. Corporate 5-10 Year Index advanced +2.2%. The Barclays U.S. Corporate High Yield Index gained +0.9%. Municipals were also higher, adding on +1.6% for June.
The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.
Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.
Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.
Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.
Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.
© 2016 Envestnet. All rights reserved.