PMC Weekly Review - July 06, 2018

A Macro View: June Monthly Recap

The domestic equity markets posted modestly positive returns for the month of June. Despite positive performance across the board, the theme of heightened market volatility continued, with up and down trading weeks throughout the month. Trade was of particular concern for investors, as President Trump ratcheted up his tariff threats, not only toward China, but other US allies. Outside of the political arena, however, corporate fundamentals and earnings growth expectations remain strong, and many active managers have used the volatility as an opportunity to reposition their portfolios.

Growth generally outperformed value during June, as the Russell 1000 Growth Index was up 1.0%, whereas the Russel 1000 Value Index returned 24 basis points. Similarly, small cap growth outperformed small cap value by 17 basis points. The lone exception was in mid cap stocks, where value outperformed growth by 42 basis points. Small cap stocks slightly outpaced their large cap counterparts during the month, as a stronger US dollar weighed more heavily on large cap companies, which typically generate a larger portion of their revenues overseas. Consumer Staples was the leading sector across the market cap spectrum, whereas Financials and Industrials were laggards. The Energy sector, though essentially flat in June, was the bestperforming sector over the trailing quarter, supported by higher oil prices.

Meanwhile, the Bloomberg Commodity Index was down 3.5%, despite the strong performance of crude oil, as precious metals and agricultural commodities weighed on returns. The FTSE NAREIT All Equity REITs Index returned 4.18% in June, making it the best month of 2018 for the broader Real Estate sector. The self-storage (7.0%), data center (6.7%), health care (5.8%) , and retail (5.8%) industries were the best performers during the month.

The international equity markets1 underperformed domestic markets in June, with the developed markets holding up better than emerging markets. The US dollar continued to strengthen against most currencies during the month, acting as a stiff headwind to international equity market returns. Emerging markets currencies were particularly vulnerable, with the Argentine peso falling the most, down more than 13% versus the US dollar. Additionally, trade concerns weighed on returns in June and affected markets around the globe, with China leading the fall and declining more than 5%. Trade tensions extended beyond China as the US threatened other restrictions, such as tariffs on cars imported from the European Union (EU). Political uncertainty in Italy along with the weakness in the euro also hampered results in the eurozone. During the month, the MSCI EAFE Index declined 1.2%, and the MSCI Emerging Markets Index was down 4.2%.

Domestic taxable fixed income markets2 posted negative returns in June, as Treasury yields rose and credit spreads widened. The Treasury curve continued to flatten, with the Federal Reserve (Fed) raising the fed funds rate another 25 basis points to a target of 1.75%-2.00%, while intermediate and long Treasury yields ended the month only slightly higher, despite moving substantially throughout the month. Economic data remained solid, supported by a strong labor market and healthy consumer sentiment, and second-quarter gross domestic product (GDP) growth estimates are approaching 4%. With a supportive economic growth backdrop and increasing inflation, the Fed telegraphed two additional rate hikes over the remainder of the year.

The Aggregate Index declined by 12 basis points, with investment grade corporates weighing most heavily on returns (down 58 basis points). Credit spreads widened eight basis points to 123 basis points above Treasurys, attributable primarily to a supply-demand imbalance, as issuance rebounded in June with an increase in debt-funded merger and acquisition activity. Foreign demand for US investment grade corporate bonds also has declined due to higher short-term rates and a stronger dollar, which have made the cost of hedging more prohibitive. US high yield spreads remained more resilient than their investment grade counterparts, widening just 1 basis point to end the month at 363 basis points, and the Bloomberg Barclays High Yield Index finished the month up 40 basis points. However, those returns were heavily skewed to the lowest-rated high yield issues, as the BB component of the Index was up just seven basis points, whereas CCC-rated issues were up 1.23% in June.

Municipal bonds outperformed all of the investment grade taxable sectors (with the exception of treasury inflation protected securities (TIPS)) across the maturity spectrum. Short municipals in particular outperformed, as high demand pushed short muni rates lower, even as similar maturity Treasury yields were rising. Across the broad municipal market, the volume of new issuance remained in line with the average for the year, and continued to be met by healthy demand from investors looking to reinvest their June coupons ahead of the issuance slowdown that typically comes in July and August. The municipal market also was supported by a Supreme Court ruling that will allow states to collect taxes from internet retailers, providing an additional revenue source that is certain to be positive for municipal credit fundamentals.

Outside the US, the strong dollar proved to be a headwind for foreign bond investors during June, as all of the major international bond indices posted negative returns for the month (with the exception of those hedged back to the dollar). European government bond yields spiked during the first half of the month on political concerns in Italy, though ultimately finished the month lower than they began. However, this price appreciation was more than offset by the depreciation of the euro against the dollar, and was a major contributor to the Bloomberg Barclays Global Aggregate Ex-US Index finishing the month down 70 basis points. Emerging markets were particularly hard hit by the strengthening dollar and growing trade concerns, with the local currency market down nearly 3% and hard currency emerging markets sovereigns down 1.2%. Emerging markets corporates faired the best, falling only 37 basis points.

David Hawal, CFA 
VP, Senior Investment Analyst

1Unless otherwise noted, returns are for the appropriate MSCI Indices in US dollar terms.
2 Unless otherwise noted, returns are for the appropriate Bloomberg Barclays Indices.

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.

© 2018 Envestnet. All rights reserved.