PMC Weekly Review - February 5, 2016
A Macro View – January Monthly Recap
Domestic equity markets entered 2016 on a decidedly sour note, extending December’s weak performance. Investors continued to grapple with several issues, including the fallout from the plunge in China’s stock prices; the Federal Open Market Committee’s (FOMC) initiation of “lift-off” of interest rates; severe losses in commodities prices; and a generally soft global economy. Economic growth decelerated in the fourth quarter and into January, causing investors to question whether the anticipated FOMC plan of raising interest rates by 100 basis points in 2016 actually will materialize. The FOMC, while monitoring financial market reaction, has indicated that inflation will be the primary determinant of the extent of rate increases. With job growth remaining fairly strong, the FOMC anticipates that wage growth will follow suit, and wage growth typically is accompanied by inflation. Domestic economic data showed slowing growth during the month, with fourth quarter real gross domestic product (GDP) coming in at +0.7%, slightly below expectations, but materially lower than the +2.0% growth of the third quarter.
Within this landscape, stocks suffered steep losses during January. The S&P 500 declined by -3.0%, on top of December’s decline of -1.6%. The performance during the first two weeks of the year was the worst since at least 1927. The Dow Jones Industrial Average (DJIA) also dropped, giving back -3.6%. The tech-heavy Nasdaq Composite Index declined -2.1%. The Russell 2000 Index of small cap stocks once again underperformed the Russell 1000 Index of large cap stocks, with returns of -3.2% and -2.8%, respectively. Growth stocks outperformed value stocks, and in terms of sector performance, the top performers in the month were utilities, health care, and consumer staples, with returns of +2.4%, +1.2% and -1.1%, respectively. Financials and energy were the poorest performers, with returns of -6.9% and -4.8%, respectively. Commodities continued their downward trend, declining -3.3%. REITs generated strong gains, advancing by +6.7%.
International equity markets generally lost ground, although losses were certainly not as steep as in U.S. markets. The MSCI World ex-U.S. Index edged lower by -0.2%. Emerging markets finally found their footing in January, in spite of the ongoing decline in commodities markets. The MSCI Emerging Markets Index inched higher by +0.6%, and the MSCI EAFE Index, which measures developed markets performance, was up +0.5%. Regionally, Asia and Japan generated the best relative performance, climbing +2.4% and +2.3%, respectively. The Latin America and Eastern Europe regions were the poorest relative performers, declining by -6.2% and -2.1%, respectively.
Fixed income markets were mostly higher, and especially so in the U.S., as investors moved to assets perceived to be safer as the equity market swooned. Yields had risen in the last quarter of 2015 in anticipation of the FOMC’s December decision to raise rates, but tumbled lower in January as investors sought a safe haven from volatility in riskier asset classes. Within this environment, the 10-year U.S. Treasury yield ended the month at 1.93%, down 34 basis points from the 2.27% level of December 31. Performance of broad-based fixed income indices was generally higher, with the Barclays U.S. Aggregate Bond Index advancing +2.1%. Global fixed income markets delivered modest losses, with the Barclays Global Aggregate ex-U.S. Index shedding -1.8%. Intermediate-term corporate bonds were higher, as the Barclays U.S. Corporate 5-10 Year Index gained +3.0%. The Barclays U.S. Corporate High Yield Index added +0.7%. Municipals continued to post solid performance, gaining +1.8%.
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