Commentaries

PMC Weekly Review - July 1, 2016

A Macro View – June Monthly Recap

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.

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