Commentaries

PMC Weekly Review - September 4, 2015

A Macro View – August Monthly Recap

Domestic equity markets plunged during the month, as fears about a slowing economy in China, and continued steep losses for Chinese equities, reverberated throughout global markets. After being one of the top performing equity markets over the previous year, Chinese stocks have declined about 27% over the past three months. The tumble is a result of a slowing economy that Chinese policymakers have been trying to stimulate through various means, one of which was currency devaluation. In addition to the meltdown in Chinese equities, domestic investors have had to grapple with anticipating how soon the Federal Reserve’s “liftoff” will occur. Many analysts still believe the Fed will choose to raise rates at least once in 2015, despite the recent market turmoil. Domestic economic data remained resilient during the month, with the latest estimate of second quarter real gross domestic product (GDP) coming in at +3.7%, comfortably exceeding expectations.

With this as a backdrop, stocks had another disappointing month in August. The S&P 500 fell by -6.0% for the month, and is down -2.9% year-to-date. It marked the S&P’s worst monthly performance since September 2011. The Dow Jones Industrials (DJIA) also declined -6.2% for the month. The tech-heavy Nasdaq Composite Index slumped -6.7% in August. The Russell 2000 Index of small cap stocks underperformed the Russell 1000 Index of large cap stocks, with returns of -6.2% and -6.0%, respectively. Growth stocks underperformed value stocks during the month. In terms of sector performance, the top performers in the month were telecom services, utilities and energy, with returns of -3.4%, -3.4% and -4.2%, respectively. Health care and financials were the poorest performers, with returns of -7.9% and -6.8%, respectively. Commodities were also lower during the month, declining -0.9%. REITs also fared poorly in August, declining by -5.6%.

International equity markets sank as well in August, underperforming U.S. markets. Economies of Eurozone countries have been on the mend, and European Central Bank (ECB) president Draghi recently reiterated his stance that the ECB stands ready to provide additional stimulus to ensure the recovery continues. The MSCI World ex-U.S. Index declined -7.3% for the month, and is now -1.4% year-to-date. Emerging markets took it on the chin again in the month, falling in sympathy with the Chinese markets, and were once again the world’s poorest performing during the month. The MSCI Emerging Markets Index fell by -9.0% for the month, and the MSCI EAFE Index, which measures developed markets performance, was down -7.4%. Regionally, Eastern Europe generated the best relative performance, but yet still declined by -5.0%. The Pacific ex-Japan region was the poorest performer, declining by -11.8% during the month.

Fixed-income markets didn’t provide investors much solace during August, with most indices posting slightly negative total returns. Despite the market turmoil in equity markets, Treasury prices remained relatively flat throughout the month, perhaps an indication that bond investors believe the Fed is likely to move ahead with a rate increase. Within this environment, the 10-year U.S. Treasury yield ended the month at 2.20%, down one basis point from the 2.21% level of July 31st. Broad-based fixed-income indices were lower in August, with the Barclays U.S. Aggregate Bond Index declining -0.1% for the month. Global fixed-income markets were one of the bright spots, with the Barclays Global Aggregate ex-U.S. Index gaining +0.4%. Intermediate-term corporate bonds were lower, as the Barclays U.S. Corporate 5-10 Year Index fell by -0.5%. The Barclays U.S. Corporate High Yield Index declined by -1.7%. Municipals were one of the only domestic fixed-income segments delivering gains, as it advanced +0.2% gain for August.

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