PMC Weekly Review - September 1, 2017

A Macro View: August Monthly Recap

Domestic equity market returns were mixed in August, with the large and mid cap core indices ending the month essentially flat and small cap core down roughly 1.0%. Volatility made a surprise appearance during the month after a positively sleepy June and July. This was driven by a sharp rise in geopolitical tensions early in the month, as President Trump and North Korea’s Kim Jong Un traded threatening statements for several days. Cooler heads appeared to prevail for several weeks as the rhetoric fell off, only to come flying back (literally) in the last week of the month after another missile test launch by the North Koreans, this time through Japanese airspace. Further complicating the domestic macroeconomic picture, hurricane Harvey hit the Texas coast, flooding most of Houston and its surroundings before moving on to Louisiana’s coastal region. Total damage from Harvey will take months to add up, particularly in terms of its impact on the domestic refining industry. Oil prices actually fell during the first few days of the storm before rebounding on the last day of the month.

On the economic data front, US gross domestic product (GDP) for the second quarter was revised higher to 3.0%, from an initial estimate of 2.6%. Consumer spending continues to be the main driver of GDP, estimated at a 3.3% growth rate in the second quarter. However, the same report showed the Personal Consumption Expenditures (PCE) Index, the Federal Reserve’s (Fed) preferred measure of inflation, fell to a 1.6% annual rate during the second quarter. This puts its planned third interest rate hike of the year in question, as the Fed has been targeting at least 2.0% inflation. July’s employment report (released in early August) was positive, with more than 200,000 new jobs added and the unemployment rate at 4.3%. Housing data remained mixed, as July’s new housing starts and new housing permits for future building both were more than 4% lower than June’s numbers. New housing starts were 5.6% lower than July of last year, but the first seven months in total are about 2.5% ahead of 2016’s pace. However, mortgage rates fell to new lows for the year during the month, which could stimulate growth in this area. And after months of negative headlines for the retail sector, July’s retail sales numbers were up 0.6% over June and were up 4.2% for the trailing 12-month period, close to the five-year average.

Within this context, domestic equities were mostly lower for the month, with the exception of the large cap growth segment. The Russell 1000 Growth Index gained just over 1.0%, while the Russell 1000 and Russell Midcap Indexes were essentially flat for the month. Hardest hit were the Russell 2000 Value Index, down over 3.0%, and the Russell Midcap Value Index, down over 2.0%. This is a significant change from last month, when all nine of the Russell domestic indices had a positive return. The Bloomberg Commodity Index as a whole was down nearly 1.5% in August, as the rally in gasoline and natural gas prices in the wake of hurricane Harvey couldn’t offset the losses in the metals and agricultural sectors. The Dow Jones U.S. Select REIT Index was down more than 1.0% despite falling yields in the US.

International equity markets were mixed in August, with the developed markets down slightly, while emerging markets continued their dominant run on the year. The MSCI EAFE Index was down about 0.5% for the month, but returns from country to country varied widely. Italy, Greece, and France showed modest gains, although the UK and Spain both were down more than 1.0%. The MSCI Emerging Markets Index posted a gain of more than 2.0% for the month, with strength in Russia, China, and Latin America.

Domestic and global fixed income markets posted another solid month in August, though not without a fair amount of volatility. The tensions between the US and North Korea, as is the case with most global incidents, had investors seeking the safety of US Treasurys. The yield on the 10-Year Treasury Note fell sharply from 2.29% to 2.19% during the first exchange, before rebounding as tensions eased. Yields fell again in conjunction with the missile test, reaching an intra-day low below 2.10% on the August 29. This fall in yields led Treasurys, especially longer maturities, to be the best-performing segment of the Bloomberg Barclays Aggregate Index for the month, up 90 basis points. Investment-grade corporates and Agency Mortgage-Backed Securities (MBS) both posted solid months as well, up 61 and 60 basis points respectively. Investment-grade municipal bonds outperformed corporates, up 75 basis points, led by A- and BBB-rated issues. The Global Aggregate ex USD Index was 1.10% in August (0.90% if the currency impact was hedged out), led by European sovereign debt. The emerging markets joined the party as well, with the Emerging Markets USD Index up 1.13% and the Local Currency (Government) Index up 0.65%. US high yield was the only major sector to post a negative return for the month, down 19 basis points, as the average spread in the Index widened by roughly 30 basis points.

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