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.
Mixed signals continue in the US economy. The Commerce Department revised 1Q-17 real gross domestic product (GDP) upward from 1.2% to 1.4%, which now represents a full doubling of the initial estimate for economic growth, as consumer spending and exports have been revised higher. On the other hand, the latest report on personal consumption expenditures (PCE) indicated that spending declined in May, restraining the overall monthly increase to just 0.1%. This reading was up 1.4% on a year-over-year (YoY) basis, a notable decline from the 1.7% annual rate reported in April, and perhaps the result of the national savings rate reaching 5.5%. The Institute for Supply Management’s Purchasing Managers Index (PMI) exceeded expectations at 57.80, led by New Orders and Production factors. In contrast, the HIS Markit US Manufacturing PMI was lower for the fifth consecutive month. Despite the unemployment rate ticking up to 4.4%, the June jobs report reaffirmed the health of the labor market. Nonfarm payrolls exceeded expectations, with 220,000 jobs added. The higher unemployment rate is primarily due to more workers entering the labor market, as participation rates have been rising alongside confidence. Wage growth has lagged expectations, continuing its relatively slow pace of 2.5%.
As expected, The Federal Open Market Committee (FOMC) utilized its mid-June meeting to further its rate hiking campaign, which now includes four 25 basis points (bps) adjustments over the past 18-months. That said, the market’s response to the rate increase has been somewhat conflicted given the continued slowdown in inflation and more tempered growth estimates. In a special supplement to the official statement, the FOMC also offered details on how it expects to begin the gradual reduction of the Fed’s $4.5 trillion balance sheet by year-end. This is to be accomplished by letting maturing bonds roll off, subject to a monthly cap limit that begins at $10 billion and slowly grows to $50 billion.
Globally, the general election in the United Kingdom (UK) did not turn out as Prime Minister May had hoped, leaving no clear majority. The election result has increased speculation that Brexit terms are now likely to be more “soft” than “hard.” The Eurozone continues to show strong signals within its economy, but the European Central Bank (ECB) has given no indication that rates will rise with inflation well in check at 1.3%. Despite its worrisome debt levels, China’s GDP for 1Q-17 was reported ahead of expectations at 6.9% and manufacturing and services PMIs rose in June.
June was a relatively moderate month for the US equity markets, with the exception of domestic small caps, which saw the Russell 2000 advance by +3.5%. The S&P 500 ended the first half of 2017 up an impressive +9.3%, with the growth-oriented Nasdaq up +14.1% year-to-date (YTD). Healthcare (+4.5%) and Financials (+6.3%) led the way in the S&P 500 this month, with the latter driven by the passing results of stress tests given to the 34 largest banks by the Federal Reserve. Sectors producing the most significant losses included Telecommunications, Utilities, and Information Technology. In the broader large stock indexes, Russell 1000 value outperformed Russell 1000 growth by 189 bps, reversing the recent trend. Style had less impact in the Russell 2000, with value edging out growth by just 6 bps.
Globally, equity returns for June varied across developed markets (MSCI EAFE was down modestly at -0.2%) and emerging markets (MSCI EM up another +1.1%). Of note, international stocks exceeded their domestic counterparts for the first half of the year, with returns of +14.2% for the basket of developed countries and +18.6% in the emerging world. Active managers have had the opportunity to add value in emerging markets thus far in 2017, with differentiation illustrated by the widely varied performance of MSCI’s Emerging Markets Asia index (+23.3%) relative to the Latin America (+10.1%), and Europe, Middle East & Africa (+4.9%) regional counterparts. Given the absence of any negative outliers across the developed international markets, results have been more uniformly strong, with the majority of countries ranging from +10% to +16% for the first six months of the year.
Real estate bounced back in June, with the FTSE NAREIT US Real Estate index up +2.2% for the month, bringing YTD results to +2.7%. The Alerian MLP index was down -0.7% for the month, with losses now at -2.7% thus far this year.
The Bloomberg Commodity Index was down slightly for the month at -0.2%, but 2017 has been challenging overall with losses of -5.3% YTD. Among commodities, Nymex West Texas Intermediate (WTI) oil was down another -4.7% for the month, and the first half of the year has been particularly difficult with a total decline of -14.3%. Gold was down -2.3% for the month, but has been up +7.9% since the year began.
Fixed income assets remained well bid throughout most of June, only to stumble a bit into the finish. The broad Bloombar Global Aggregate index suffered a modest loss of -0.1%. However, YTD performance of +4.4% is pacing well ahead of the return investors should expect to capture with yields still quite depressed from a historical perspective. Worth noting, the sustained decline in the US dollar (especially relative to the euro), and the resulting positive impact of currency translation for US-based investor, has accounted for nearly 70% of the return for this unhedged benchmark in the first half of the year.
Domestically, the US Treasury (UST) yield curve continued to exhibit a flattening bias, as the FOMC affirmed its stance to move forward with normalizing monetary policy. Policy sensitive 2-year UST yields marched consistently upward, closing at a post-crisis high of 1.38%. Longer-term rates trended down toward pre-election levels, and the 30-year bond closed at 2.84%.
Subsequently released meeting minutes indicated Fed officials had “expressed concern that subdued market volatility, coupled with a low equity premium, could lead to a buildup of risks to financial stability.” Despite the trend of increased policy signaling, any unanticipated eagerness on the part of the Federal Reserve, or other prominent central banks, is a tail risk that could prompt an adjustment in asset prices. With the roughly 50% implied probability of an additional rate hike before year-end, the market’s interpretation of “gradual” policy adjustments is starting to look relatively dovish.
The Bloombar US Aggregate index posted a negative return of -0.1%. The Bloombar US Corporate Investment Grade index added just over +0.3% in June, as strong investor demand drove credit spreads to their tightest level since mid-2014. The Bloombar US Corporate High Yield index provided more muted returns of +0.1%, as energy-related names reacted to declining oil prices and spreads widened a bit overall. Emerging market bonds cooled slightly, but were able to extend their impressive YTD rally, driven by the attractiveness of higher interest rates offered versus developed market bonds and steady/improving economic fundamentals.
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.