Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
June was an active month with a number of geopolitical and trade policy headlines, but no definitive outcomes. The summit between North Korea and the US was a step toward increasing communication and cooperation between the countries, but measurable action is not assured. The issue of global trade continues to weigh on markets, as leaders of China and the US escalate tariff rhetoric. Even traditional American allies, including key EU countries, Japan, Canada, and Mexico would be affected by possible tariffs, with this drawing retaliatory warnings.
The Federal Open Market Committee (FOMC) met in mid-June, voting unanimously to increase short-term interest rates to a targeted range of 1.75% to 2.00%. The overall tone of the message was slightly more “hawkish,” with the unofficial dot-plot projecting five more 25 bps adjustments by the end of 2019. Core PCE remains fairly well-contained but has finally achieved the stated objective of 2% (first time since 2012).
The US economy grew at a 2.0% rate in 1Q-18, with the latest revision of GDP revised down by additional 20 bps due to lower net exports and inventory investments. With fiscal stimulus tailwinds taking hold, consensus expectations call for stronger 2Q-18 growth of 3.5% to 4.0%. Still, the FOMC’s longer run GDP projection of 1.8% reflects structural challenges.
The unemployment rate unexpectedly increased from 3.8% to 4.0% in June, but this was due primarily to an increase in the labor force participation rate. Nonfarm payrolls exceeded expectations, adding 213,000, with April and May also revised higher. Wages continued to rise moderately, with a steady increase of 2.7% year-over-year.
Brexit negotiations continue, with the UK trying to develop its breakup approach with the EU. The potential for a “hard Brexit” appears to be in play, although a more moderate compromise deal is likely. The stronger US dollar continues to weigh on the disparate mix of emerging market countries. Global consumer and business confidence remains reasonably strong, but the economic surprise index (outcomes versus expectations) has been slowly trending lower.
Ultimately, June was a moderate month for risk assets across the globe. Large cap domestic equities were up in the first half of the month but retreated somewhat as trade concerns became more intense. The S&P 500 ended up +0.6% for the month, building on a strong May and retuning +2.6% for the first half of 2018. Consumer Staples and Discretionary were both solid, at +4.1% and +3.5% respectively. Industrials (-3.4%) and Financials (-2.0%) were laggards for the month. At the halfway point of 2018, Consumer Discretionary (+10.8%) and IT (+10.2%) lead the way.
Small cap stocks maintained their strength in 2018, gaining +0.7% for the month, and now up +7.7% for the year. The category’s perceived shelter from the global trade issue has been supportive to returns. Growth and Value were both solid, with growth outperforming only marginally. For the year, growth has outperformed value by +4.3%.
In the broad international developed markets, the MSCI EAFE index was down -1.2% in June. Among the various regions, the Eurozone was down -0.6% while Japan was down -2.5%. The MSCI Emerging Markets index was down another -4.1% for the month. The category is now down -6.5% in 2018 and has relinquished its 12-month edge over domestic equities. Currency fluctuations continue to weigh on the returns earned by US investors, with the US dollar strengthening modestly (+0.5%) against developed markets and more aggressively versus emerging markets (+2.6%).
Real estate was up once again in June, with the FTSE EPRA/NAREIT Developed index up +1.6% during the month, moving the index into positive territory for the year at +0.9%. The FTSE NAREIT US Real Estate index gained +4.1%, also moving positive for the year at +1.1%.
Oil experienced a volatile rally (+10.6%) in conjunction with OPEC quotas and the implications of Iran sanctions. That said, the Alerian MLP index reversed course, losing -1.5% in June and moving back into negative territory for the year. The Bloomberg Commodity index had a poor month, dropping -3.5% and moving back to flat for the year.
US Treasury (UST) yields rose across all maturities amid the equity rally in the first half of June, but the yield curve flattened notably after the FOMC’s announcement and the escalation of trade concerns. The overall UST complex was essentially flat for the month, although longer-dated issues continued to outperform (20+ year index up +0.2%). Front-end yields ended off their intra-month highs, but nonetheless the 2-year UST ended 10 bps higher at 2.53%. The benchmark 10-year UST yield briefly re-tested the psychologically relevant 3% level but ended the month unchanged at 2.86%. The futures market is pricing a ~50% chance of both September and December hikes, but lags FOMC projections in 2019 and 2020.
The Bloombar US Aggregate index posted a modest loss (-0.1%) in June, pulling year-to-date returns down to (-1.6%). Agency MBS slightly outperformed government issues on a duration-matched basis. That said, investment-grade corporates were the worst performing sub-sector as credit spreads were another 8 bps wider, taking all-in category yields to just above 4.0%.
The Bloombar 1-15-Year Municipal index returned +0.2%, as tax-exempt issues again outperformed taxable counterparts. Shorter maturities continue to set the pace, with 2-year AAA general obligation bond yields falling by 13 bps as a result of a strong retail bid throughout the month. The relative steepness of the municipal curve provides a significant roll-down advantage for managers able to extend even slightly. Credit risk is also being rewarded, with BBB’s outperforming higher quality issues.
The Bloombar US Corporate High Yield index advanced +0.4% in June and is now back into positive territory for 2018. The benchmark’s overall spread was virtually unchanged, but the credit curve continues to flatten (CCC vs. BB declining), which is unusual as the credit cycle ages. Unhedged international government bonds, particularly local currency emerging market debt (-2.9%), struggled given the ongoing rally in the safe-haven US dollar.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.