PMC Weekly Review - August 5, 2016
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%.
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.