Commentaries

PMC Weekly Review - May 5, 2017

Domestic equity markets rebounded from a weak March, posting a relatively strong April. Although the headlines continue to be overshadowed by legislative and other news from Washington, D.C., first quarter corporate earnings are dominating the markets. With nearly two-thirds of the S&P 500 having reported (by market cap), earnings per share (EPS) is on pace to rise by more than 15% over the same period as last year. The first quarter of 2016 was particularly weak for earnings growth, making for some easy comparisons for this quarter. But the rebound in the second and third quarters of 2016 will make the next two quarters’ comparisons more difficult. This is particularly true in the Energy sector, as crude oil has risen from the low $30s in early 2016 to the low $50s for most of this year’s first quarter. First quarter gross domestic product (GDP) came in below expectations, at just 0.7%, but the FOMC bolstered the market somewhat in its meeting this week, calling the weak report “transitory” and noting solid job growth and good fundamentals underpinning consumer spending. The April jobs report, with 211,000 new jobs added and unemployment (U-3) falling to 4.4%, further substantiated this position. The strong report creates a high probability of a hike in the Federal Funds rate in June.

Within this context, domestic equities were mostly higher during the month. The S&P 500 gained +1.03%, the Russell 1000 gained 1.06%, and the Russell 2000 finished the month up 1.10%. This performance was heavily tilted toward growth-oriented stocks, however, as the Russell 1000 Value Index was actually down 19 basis points in April, and the Russell 2000 Value was up just 39 basis points. The Nasdaq Composite Index rose by +2.3%, breaking through the 6,000 level for the first time. The top-performing sectors in the month were Information Technology, Consumer Discretionary, and Industrials, while Telecommunication Services and Energy sharply underperformed. Commodities had a very rough month, particularly anything related to Energy or Industrial Metals. REITs continued to move sideways: the Dow Jones U.S. Select REIT Index was down 24 basis points in April, after being down 27 basis points in the first quarter.

International equity markets continued their strong year in April, with most markets outperforming US equities. The MSCI World ex-U.S. Index posted a return of +2.13% for the month, led by France (+5.35%) and Spain (+4.55%). Similarly, the MSCI Emerging Markets Index posted a gain of +2.19% for the month, with strength in Europe and Asia offsetting weakness in Latin America. The Euro and most European currencies rallied against the dollar during April as concerns over the French election faded and economic growth continued to improve across the trading bloc. The dollar strengthened against most Latin American currencies, as the region continues to struggle economically, and against the South Korean Won, as that country works through both the removal of its President in a corruption scandal and increased tensions with North Korea.

Fixed income markets rallied globally in April, after mixed results in March. The U.S. Treasury curve continued to flatten, as short yields rose modestly out to two years, while those on maturities greater than 3 years fell 5 to 12 basis points. The 2/10 differential fell 12 basis points in April to 1.01%, after falling 10 basis points in the first quarter, and the 2/30 differential fell 7 basis points to 1.68, after falling the same 7 basis points in the first quarter. Of note, the yield curve continues to steepen in the back end, as 30-year yields fell 5 basis points less than the 10-year yield. The Bloomberg Barclays U.S. Aggregate Bond Index posted its best monthly gain since last June, up 77 basis points, led by strong returns in corporate bonds. Non-investment grade bonds continued to rally, as the Bloomberg Barclays U.S. Corporate High Yield Index was up 1.15%, and the S&P LSTA Leveraged Loan Index was up 44 basis points. Municipal bonds outperformed their taxable counterparts in April in the short and intermediate maturities, but the longer ones lagged slightly. Limited issuance and steady demand continue to support the tax-exempt market. As positive as April was for the domestic fixed income markets, the global fixed income markets did even better. The Bloomberg Barclays Global Aggregate ex-U.S. Index returned 1.42%, while the JPMorgan EMBI Global Diversified Index was up 1.49%. The Bloomberg Barclays Global High Yield Index was up 1.73% for the month, led by the European high yield markets, up more than 3%.

Download the full PDF

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.