Global capital markets all moved higher in June. The major domestic equity market benchmarks all advanced in the 7% range. The broad domestic bond market was up 1.26%; high yield bonds 2.28%. Overseas markets moved higher as well with International Developed and Emerging Markets returning 4.11% and 4.07% respectively.
Global bonds also rallied notching a gain of 1.40%. Interest rates continue to fall globally. Domestically the yield on the benchmark 10- year treasury bond closed the month at a level of 2.09% down marginally for the month.
During the month there was a rotation into more value-oriented stocks domestically. Value outperformed Growth across capitalization styles (large mid, and small) in a departure from the first five months of 2019. The more cyclical sectors (e.g. Materials and Industrials) of the S&P 500 outperformed the more defensive sectors (Consumer Staples and Utilities). All eleven sectors turned in positive results with Materials and Energy posting the best monthly gains - 11.48% and 9.07% respectively.
With the exception of Real Estate (up 1.26% for the month) all sectors advanced at least mid-single digits on a percentage basis. The poor relative performance of the Real Estate sector may be due in part to its extended advance over the first part of the year (advancing nearly 19% year-to-date).
Looking at year-to-date sector performance, the poorest performer is Health Care which advanced just over 7% through the end of June. Information Technology and Consumer Discretionary stocks continue to be the best performers with year-to-date returns of 26.12% and 20.99% respectively. Again, the more defensive sectors lag the cyclical sectors on a relative basis year-to-date through June. That said, the Consumer Staples, Utilities, and Health Care sectors (all “defensive” in nature) have gained 14.46%, 12.82% and 7.12% year-to-date.
Year-to-date through June capital markets have advanced smartly. The S&P 500, NASDAQ, and Dow returned 17.35%, 20.66%, and 14.03% respectfully. Developed International markets returned 11.43%; Emerging Markets 8.71%. Bond returns globally are running in the 6% range with domestic high yield bonds advancing nearly 10%.
With the exception of May global capital markets have enjoyed a steady rise. As we look towards the second half of 2019 the fundamentals are mixed. Economic activity and releases have been decent. Monetary policy domestically is anticipated to be accommodative after the Federal Reserve changed course at the beginning of the year. Corporate earnings for the S&P 500, however, look to be deteriorating as Q2 and Q3 earnings are anticipated to be flat to slightly negative on a year-over-year basis. Q4 earnings are anticipated to grow in the mid-single digits range.
Trade negotiations with China and the resultant news flow will continue to weigh heavily on the capital markets. The disappointing returns experienced in May and recovery in June can be attributed in a large part to news flow (or lack thereof) around the negotiations. We anticipate the situation and negotiations will continue to ebb and flow. While returns through June are nothing short of spectacular we caution against extrapolating them for the year. Six months is an eternity in the capital markets as evidenced last year.
Week in Brief:
Trading volume was light for the holiday shortened week. The big event was the jobs report on Friday. Non-farm payrolls came in much better than expected (224,000 versus expectations of 165,000). The unemployment rate ticked up slightly to 3.7% but remains close to 50-year lows. Non-farm payrolls were revised down slightly for May and April. The trend in employment continues to be strong. Wage growth for July was 3.1% on a year-over-year basis, running slightly below estimates. The bottom line for all of this is that the probability of a .50% rate cut at the FOMC meeting later this month is off the table. Markets believe a .25% rate cut is almost a certainty. In aggregate economic data continues to be mixed.
As exhibited above it was another up week for both domestic equities and fixed income securities. While the 10-year yield traded below 2% for a lot of the week it closed just above 2%.
High visibility earnings releases next week include Pepsi on Tuesday; Bed Bath & Beyond Wednesday, and Delta Airlines and Fastenal on Thursday. Q2 earnings reports begin in earnest in a week or so.