August 15, 2017

Monthly Market Summary – July 2017

Financial markets advanced in July as the global economic expansion gained momentum. In the U.S., the Dow Jones Industrial Average (DJIA), S&P 500, NASDAQ, and Russell 2000 indices reached new record closing highs during the month.  Strong corporate earnings reports helped drive equity prices higher.  Close to 70% of the S&P 500 companies that have reported had earnings that beat analysts’ estimates, which is an unusually high rate of beats.  Another positive for the U.S. equity markets was the report that second quarter gross domestic product (GDP) growth was 2.6%, which was more than double the growth rate for the first quarter.  The GDP growth was due to an increase in business equipment investment and consumer spending.  A third driver of positive investor sentiment was weak data on retail sales and inflation that suggested the Federal Reserve (Fed) will likely be slow to raise interest rates further and to reduce its balance sheet, which will help keep borrowing rates low.

Market Indices – July 2017

Outside the U.S., economic news was mostly positive. For example, in Japan, exports rose 9.7% over the prior year.  In the eurozone industrial production was up 4% with production up more than expected in Germany, France, and Spain.  In China industrial production rose 7.6%, services grew at a 7.7% rate, and retail sales increased 11%.  In a sign of improving economic conditions, the Bank of Canada raised its policy rate by 0.25% to 0.75% in July.  This was the first rate increase in seven years.

The major U.S. equity index returns we track were each positive for the month of July. Large-capitalization (cap) stocks outperformed mid-cap stocks and both outperformed small-cap stocks.  After a one-month break in the trend, growth stocks again outperformed value stocks and widened the significant year-to-date performance gap.  The S&P 500 Growth index year-to-date return is 16.3% compared to the 6.3% return for the S&P 500 Value index.  Likewise, the Russell 2000 Growth index year-to-date return is 10.9% compared to the 1.2% return for the Russell 2000 Value index.   All industry sectors in the S&P 500 had a positive return for the month.  Only two sectors, healthcare and consumer discretionary, had a negative return in the Russell MidCap index.  These same two sectors were also negative for the month in the Russell 2000 index along with the materials sector. The telecom sector had the highest return in the S&P 500 and Russell 2000 while information technology was the best performing sector in the Russell MidCap index.

Non-U.S. equity indices outperformed U.S. indices with the MSCI Emerging Markets (EM) index posting the highest return of 6.0%. The MSCI EAFE index had a return of 2.9%.  Currency movements provided a boost to U.S. investors in international equities as the dollar continued to decline.  On a local currency basis, returns for the EM and EAFE indices were 4.9% and 0.7% respectively.  The only negative sector in the EM index for the month was healthcare which had a -0.1% return.  The highest sector return was the 11.4% return for the real estate sector.  On a geographic basis the BRIC (Brazil, Russia, India, and China) countries index had the highest return of 8.6%.  Brazil rebounded from a negative second quarter return with a gain of 11.0% in July after passage of a major labor reform package.  China had one of the best returns with an 8.9% gain boosted by better than expected data on industrial production, business investment, and retail sales.  India was up 7.7%.  Russia gained 4.1% with the help of higher oil prices.  In the developed international stock index, materials was the best performing sector and healthcare had the weakest return.  Most country indices had a positive return with European countries, such as Norway, Italy, and Spain posting the highest returns.  Israel with a -1.9% return was a notable exception.

The Bloomberg Barclays U.S. Aggregate Bond index had a small positive return of 0.4% for July. Among the major bond market sector indices, only the longest maturity Treasury bond index had a negative return, which was less than  -1% as yields on long-term bonds rose slightly.  Short and intermediate maturity Treasury bond yields were little changed.  The yield on the benchmark 10-year Treasury bond was 2.30% at the end of July compared to 2.31% at the end of June. High yield corporate bonds were the best performing as strong corporate earnings are supporting credit quality and investors continue to reach for higher yielding securities.

After four consecutive months of negative returns, the Bloomberg Commodity index posted a positive return of 2.3% in July. The main reason for the rebound was the 9% gain in the petroleum sub-index.  The price of West Texas Intermediate crude oil advanced during July from the mid $40 per barrel range to near $50 per barrel at the end of the month.  The industrial metals sub-index also had solid gains of 4.1% helped by improving demand.  The price of copper reached a 2 ½ year high in July.  Both gold and silver were higher for the month.  The grains and livestock sub-indices, however, had sizeable declines.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

Since there were no significant changes to economic data or government policies our outlook has not changed. Most economic data continues to point to stable to improving global economic conditions, which is likely to be generally supportive for corporate earnings.  However, with the strong equity markets over recent months, valuations are not cheap.  Therefore, we continue to have a neutral view on global equities.  Our tactical allocation recommendation remains as an equal weight to the long-term target allocation for U.S., international developed, and emerging markets stocks as well as to U.S. large-cap, mid-cap, and small-cap stocks.  We continue to favor equity over bonds so retain our underweight recommendation for fixed income investments.  Our underweight recommendation is because the return expectation for bonds is modest due to the low level of yields and the prospects for yields to move higher (and prices lower) if inflation picks-up and the Fed continues to hike its policy rate as it has suggested.  Within fixed income we continue to recommend a focus on short to intermediate term bonds.  We also continue to favor non-Treasury bonds for the yield advantage they provide.  We continue to favor hedge fund strategies over fixed income for the lower expected volatility portion of portfolios but also recommend an underweight allocation to hedge funds.  Since our expectation is for a moderate rate of inflation to continue, we recommend an equal weight to real assets.  We would not be surprised if financial markets experience bouts of volatility as more details emerge about any fiscal, monetary, or political policy changes or if there are delays in implementing these actions.  Therefore, we continue to recommend using periods of market strength to raise any cash needed to support spending needs over the coming 12-24 months.

 The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

 The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.