PMC Weekly Review - August 03, 2018

A Macro View: July Monthly Recap

Domestic equity markets posted strong returns in the month of July, with most of the price appreciation coming in the first two weeks of trading. During the month, markets reached highs not seen since the end of January on news of strong economic data. The unemployment rate declined to 3.9%, the second lowest rate in the last 48 years, and second-quarter US Gross Domestic Product (GDP) grew 4.1%, the highest rate in almost four years. For the time being, it appears that the US’s strong economic activity is overshadowing the very serious concerns of a global trade war, as the Trump Administration aggressively renegotiates trade deals with the European Union and China. Even with valuations near all-time highs, companies are still repurchasing their own stock. Last quarter marked a record, as US companies spent almost $437 billion on buyback plans.

For the month of July, the S&P 500 Index and the DJIA returned 3.72% and 4.83%, respectively, as 83% of the S&P 500 companies reported earnings per share that exceeded expectations. For the first time since February, large cap domestic stocks outperformed small cap equities, as the Russell 1000 Index returned 3.45% and the Russell 2000 returned 1.74%. Mid cap stocks also outperformed small caps, with the Russell Mid Cap Index gaining 2.49%. Value stocks outperformed growth stocks, with the Russell 3000 Value Index returning 3.79% compared with 2.84% for the Russell 3000 Growth Index. Sector performance was strong, with positive returns across the board. The high-end Industrials and Health Care sectors generated returns of 7.32% and 6.61%, respectively, whereas the Real Estate and Energy sectors returned 1.08% and 1.42%, respectively. The Bloomberg Commodity Index, recently the worst-performing asset class for the quarter, incurred a loss of 2.13%.

International equity markets posted weaker results when compared with their domestic large cap counterparts, with the MSCI ACWI ex-U.S. Index returning 2.39% for the month of July. The European Central Bank (ECB) indicated no change to its accommodative monetary policy, pledging to keep interest rates the same for at least another year. Additionally, the potential for a trade war between the US and the European Union seems to have diminished after President Trump and European Commission President Jean-Claude Juncker agreed to work to lower trade barriers between the two trade partners. Both parties promised to forgo placing further tariffs while negotiations are under way. Economic activity continues to be positive, as the International Monetary Fund reported real global GDP growth of 3.64% for the first quarter. Furthermore, the ECB is forecasting real GDP growth to hit 2.4% for 2018. International developed equities and emerging markets equities posted similar returns for the month, with the MSCI EAFE Index up 2.46% and the MSCI EM Index 2.20%.

Fixed income markets produced mixed returns for the month, as longer-term yields trended higher. The yields on the 3- month Treasury Note and the 10-Year Treasury Bond increased, ending the month at 2.03% and 2.96%, respectively, resulting in a further flattening, albeit small, of the US Treasury curve. Despite the strength in GDP, driven by consumer spending and nonresidential business investment, Federal Reserve policy makers are expected to continue their gradual pace of interest rate hikes, with two more in store for the year.

The Bloomberg Barclays U.S. Aggregate Bond Index increased 0.02% for the month, with investment-grade corporates contributing 83 basis points for the month, whereas US government and Treasury securities were down 0.41% and 0.42%, respectively. Global bonds struggled relative to domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index lost 0.17%. However, emerging markets debt was the best-performing asset class within fixed income, returning 2.50%. High yielding fixed income securities posted strong performance, returning 1.09% for the month.

Municipal bonds posted positive returns, and outperformed their taxable counterparts, with the Bloomberg Barclays Municipal Index returning 0.24% for the month. Within the municipal space, the shorter-term securities fared better, with the 1-2 Year Index beating the 22+ Year Index by 20 basis points.  

Scott Keller
Associate Portfolio Manager

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