PMC Monthly Recap - June 2019
The domestic equity markets rallied sharply in June, sharply enough to recover the losses from April and May and end the quarter in positive territory across the board. The primary driver was Federal Reserve’s (the Fed) pivoting to a dovish tone by holding rates steady at its June meeting and indicating a willingness to cut rates should economic growth slow. By mid-June, market participants had fully priced in a rate cut at the Fed’s July meeting. The Trump Administration also began making conciliatory overtures to the Chinese on trade prior to the G-20 summit at the end of June. During the summit, the two sides agreed to hold off on any further tariff increases for the time being.
There was no clear trend in the domestic markets in June. The Russell 2000 Growth Index was the best performer, up 7.70%, but its value counterpart was the worst performer, rising just 6.37%. The growth index outperformed value in mid caps as well, but the reverse was true for large caps, particularly the mega cap stocks. The large value index outperformed small value by 1.00%, but the large growth index underperformed the small growth index by 0.80%. The Materials sector was the top performer across all market caps for the month, whereas the Industrial sector was the second-best performer in both the small and mid cap indices. The Energy and Information Technology sectors rounded out the top three for large caps. More conservative sectors such as Real Estate and Utilities were consistent underperformers (though still positive for the month) across all market caps as well.
The international equity markets lagged domestic stocks during June, but still managed to post solid returns for the period. The MSCI EAFE Index was up 5.93% during the month, with growth outperforming value (6.50% versus 5.33%), continuing a trend that has persisted for the better part of two years. European stocks generally outperformed despite economic growth remaining sluggish, as the European Central Bank (ECB) continued to voice its commitment to providing stimulus as needed. Japan, despite generating positive returns (3.98%), was one of the more notable laggards during the month.
The emerging markets also were well into positive territory, with that index up 6.24% for the month. Argentina, which only recently returned to the index following a ten-year downgrade to frontier market status, led the way with a 26.60% return. China (+8.06%) also rebounded, following sharply negative performance in May, as trade tensions with the US eased. India (-0.27%) was one of the few negative performers during the month due to concerns around domestic growth and a liquidity squeeze in the nonbanking finance sector.
The domestic fixed income markets continued May’s sharp rise with positive returns across all sectors and all points on the yield curve. The Fed’s dovish tone, as noted above, encouraged fixed income market participants to push Treasury yields down across the curve in June and tighten credit spreads in both investment grade and high yield bonds. The curve did steepen during the period, with short-term rates falling roughly 25 basis points more than long-term rates. The US Aggregate Index was up 1.26% in the month, led by corporate issues, which were up 2.45%. Treasurys and securitized issues both returned less than 1.00%. Noninvestment grade bonds were up 2.28% in June, as the average spread tightened by more than 50 basis points. The S&P/LSTA Leveraged Loan Index rose just 24 basis points last month, as the loans’ floating rate nature became decidedly less attractive. Investors added nearly $11.5 billion to taxable mutual funds in June, primarily to intermediate maturity and multisector funds.
The municipal market also posted positive returns across all credit qualities and maturities, though not quite as strong as the taxable market. Shorter maturities outperformed in the month, with the 5-year index up 55 basis points, the 10-year index up 37 basis points, and the 22-year-and-higher index up just 24 basis points. Lower-rated issues outperformed their higher-rated peers, and the high yield municipal index was up 52 basis points. The municipal market continues to be driven by both favorable fundamentals and strong technical factors. States have broadly benefited from rising tax revenues and limited increases in spending or borrowing. On the technical side, new issuance is slightly above last year’s pace ($167 billion vs. $166 billion), but net new issuance (subtracting refinancing issues and maturities) declined by $9 billion for the year. At the same time, investors have added $47 billion to municipal mutual funds in the first six months.
Developed market sovereign credits were up 2.84% in dollar terms in June, and global yields fell in conjunction with US yields. Nearly half of that return was due to the depreciation of the dollar, however, as the local currency return was just 1.52%. The yield on the 10-year German Bund fell 16 basis points, from -0.20% to -0.36%, with similar drops in France, Switzerland, and the UK. In its most recent meeting, the ECB extended its forward guidance, committing to unchanged policy rates through the first half of next year. This has created a slightly flatter yield curve across the eurozone, as opposed to the steepening of the US curve. Emerging markets bonds were laggards for the quarter, with the hard currency index up just 41 basis points and the local currency index up 30 basis points. There were some pockets of strength, such as Turkey (7.20%), Brazil (3.20%) and Chile (2.10%), whereas Argentina (-16.10%) was by far the weakest.
Sr. Investment Analyst
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