July 09, 2020

Monthly Market Summary – June 2020

The recovery in prices for risky assets continued during June.  Prices for global equities, bonds, and commodities moved higher during most of the month resulting in positive returns for all but one of the asset class indices shown below.  Economic data released during the month showed improvement reflecting the gradual reopening of businesses and easing of other restrictions, such as on the size of gatherings.  One of the most impressive reports was the monthly labor report for the U.S.  That report showed 2.7 million jobs were added and the unemployment rate declined to 13.3% which far exceeded analysts’ forecasts for a loss of jobs and a rise in the unemployment rate to 19%.  Indices of both manufacturing and services activity improved in the U.S. and other regions.  Retail sales jumped from the prior month and consumer sentiment improved.  Accommodative monetary policy around the world also provided a boost to sentiment.  For example, in the U.S., the Federal Reserve said it intends to keep its near 0% key interest rate unchanged until 2022.  Brazil, Mexico, and Russia cut their key policy interest rates again.  The Bank of England increased the size of its quantitative easing program.  However, not all the news was positive during June.  Markets were shaken later in the month on signs that the pandemic is still a major risk.  The number of new COVID-19 cases in the U.S. trended higher especially in southern states that were among the first to lift pandemic related restrictions.  The virus continued to spread through many emerging market countries such as India and Brazil.  In addition, regional flare-ups occurred in countries, such as China, South Korea, and Germany, that were thought to have the virus contained.  Political tensions in various regions added to investor concerns.  In addition to protests in U.S. cities, China and India had a brief military confrontation, and tensions between the U.S., United Kingdom, and China flared over developments in Hong Kong.

U.S. equity markets began the month on a strong note but moved lower in the second half of the month as worries increased.  The S&P 500 index briefly rose enough to return to positive territory for the year before pulling back again.  The technology company heavy Nasdaq Composite index rose to cross the 10,000 mark for the first time on June 10.  The index had a large decline the next day but recovered and set two additional record highs during the month.  Each of the U.S. equity indices we track, except the S&P 500 Value index, posted a positive return for the month.  Small-capitalization (cap) stocks were the performance leaders outperforming large-cap stocks that outperformed mid-cap stocks.  Growth stocks again outperformed value stocks by a wide margin in each market cap category.  The top performing sectors were information technology, consumer discretionary, and materials.  The defensive utilities sector was the weakest performing sector with a negative return in each of the market cap categories.  In a change from prior months, returns for the major U.S. equity indices lagged returns for international and emerging markets indices.

The MSCI Emerging Markets (EM) index with a return of 7.4% outperformed the 3.4% return for the MSCI EAFE index of developed international country equities and the major U.S. indices.  U.S. dollar based returns for both the EAFE and EM indices were higher than the local currency returns since various currencies appreciated against the dollar.  Growth stocks outperformed value stocks in the EM index.  However, there was little difference between growth and value sector returns in the EAFE index.  Sector returns varied.  In developed international markets, industrials and consumer discretionary stocks had the best returns while in emerging markets healthcare, real estate, and communication services had the best returns.  In both the EAFE and EM indices, energy and utilities were among the weakest performing sectors.  On a geographical basis, among developed international countries, the Pacific ex Japan region was the top performer boosted by the double-digit gain for the New Zealand index.  Taiwan, China, and South Korea had the best returns among emerging markets countries while Russia, Greece, and Mexico lagged with negative returns.

U.S. bond market sector returns were mostly positive in June.  Mortgage-backed securities was the only major sector to post a negative return.  For the third consecutive month, Treasury bond yields moved in a tight range during the month.  Both the 10-year and 30-year Treasury bond yields, at 0.66% and 1.41% respectively on June 30, were unchanged.  Corporate bonds had the best returns in the fixed income markets since prices rose in reaction to news that the Federal Reserve expanded its corporate bond-buying program to the secondary market.

The Bloomberg Commodity index posted a positive return in June.  Returns were positive for each of the sub-indices we track except for the livestock index.  For the second month in a row, the petroleum sub-index had the best return.  That sub-index gained almost 10% as crude oil prices continued to rebound on improving demand for oil and sharp production cuts.  The price of West Texas Intermediate crude ended June near $40.00 per barrel, which was up from the May close of $32.32.  The industrial metals sub-index also posted a strong gain as reports indicate manufacturing activity is picking-up as economies reopen.  Gold reached an eight-year high in mid-June on continued strong demand for safe haven assets.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

The reopening of economies and the resulting pick-up in business activity is encouraging, but there is a long way to go to return to pre-pandemic levels in key areas such as unemployment.  The path of recovery is likely to be uneven and vary by sector and geographic region.  The uptick in new COVID-19 cases experienced during June and reinstatement of some shutdowns and restrictions in certain areas around the world is a case in point.  In addition to concerns about new pandemic related restrictions, other issues are resurfacing, particularly political tensions related to upcoming elections, trade policy, and security policy.  Therefore, we expect volatility to remain high in reaction to news headlines.

We continue to recommend keeping at least a year of cash on hand to be in a position to ride out market volatility.  We have a neutral view on growth relative to value preferring to have exposure to sectors where previous growth trends are largely intact or are likely to accelerate because of the pandemic impacts along with some exposure to cyclicality to participate when the economy improves.  With bonds looking expensive with yields at historic lows, we favor equities over bonds.  Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international and emerging markets equities.  Within our fixed income recommendation, we continue to favor short to intermediate maturities.  We continue to recommend an underweight allocation to hedge funds.  We recommend looking at opportunities to do tax loss harvesting and portfolio rebalancing.

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.