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.
July was filled with plenty of generally positive economic news, but there were some notable challenges. For example, Facebook lost $119 billion in market value, the largest single day loss in history, after a disappointing quarterly call. Trade turmoil continued, with no clear resolution on the horizon despite a successful meeting between the US and the European Union (EU).
The Federal Open Market Committee (FOMC) met at the end of July, voting to leave short-term interest rates at a targeted range of 1.75% to 2.00%. The overall tone of the media statement was slightly more “hawkish” than the mid-June statement, touting the “strong” economic activity and the growth of spending and business investment. Core PCE remained fairly well-contained at 1.9% allaying some short-term inflation fears.
The US economy grew at a 4.1% rate in 2Q-18, according to the Bureau of Economic Analysis’ first estimate. Strong consumer and business spending led the way, with an increase in exports (notably crops) ahead of likely tariffs helping to drive growth. Future investment for inventory re-building is likely to contribute to continued growth in 3Q-18.
The unemployment rate decreased from 4.0% to 3.9% in July, with employers adding 157,000 jobs. While the jobs number was below expectations, the already strong May and June numbers were revised upward by a total of 59,000. The labor force participation rate remained at 62.9%. Wages continued to rise only moderately, with the year-over-year increase remaining relatively subdued at 2.7%.
China’s trade war with the US continues its rollercoaster ride, with some tariffs already in effect, while others are pending or just threatened. It can be seen as positive that negotiations continue. The People’s Bank of China eased its monetary policy via loans to financial institutions and is lowering reserve requirements partly in response to the ongoing stress.
Equities shrugged off the political banter, uncertainty over tariffs, and faltering Brexit negotiations to instead focus more intently on continued solid earnings. All major equity markets were up for the month, led by the S&P 500. Large cap domestic equities were up +3.7% in July and have now risen +6.5% on the year. Industrials (+7.3%), Healthcare (+6.5%) and Financials (+5.2%) led the way, while Real Estate and Telecom both trailed, though still up +1.0%.
Small cap stocks continued to post strong results, gaining +1.7% for the month. This category is considered to be more sheltered from global trade tensions and is now up an impressive +9.5% for the year. Growth and value were both solid, with value outperforming growth by only 5 bps. For the year, growth has outperformed value by +4.3%.
In the broad international developed markets, the MSCI EAFE index was up +2.5% in July, and is flat for the year. Among the various regions, the Eurozone was up +3.3% and Pacific ex Japan was up +1.9%. Japanese equities were up only modestly at +0.4% given a relatively weak Yen.
The MSCI Emerging Markets index reversed course somewhat in July and was up +2.3% for the month. The category remains down -4.4% for the year, mostly attributable to local currency weakness versus the US dollar, which hinders returns for US-based investors.
Real estate was up again in July, with the FTSE EPRA/NAREIT Developed index up +0.9% during the month. Oil reversed course in July, down -7.3% after the double digit rise in June. The Alerian MLP index moved significantly the other way, up +6.6% and comfortably back into positive territory for the year. The highly diversified Bloomberg Commodity index had another poor month, dropping -2.1% and moving into negative territory for the year.
US Treasury (UST) yields trended higher across all maturities throughout July and the curve continued to flatten. The overall UST complex was down -0.4% for the month, with longer-dated issues showing the most sensitivity to increasing yields (20+ year index down -1.5%). Front-end yields ended near intra-month highs, with the 2-year UST settling 14 bps higher at 2.67%. The benchmark 10-year UST yield continues to flirt with the psychologically relevant 3% level, ending the month 10 bps higher at 2.96%. The futures market is now pricing approximately 75% chance of both September and December hikes, despite President Trump’s public lament of policy normalization.
Total returns for the Bloombar US Aggregate Bond index were essentially flat during July, but year-to-date results remain down -1.6%. Investment grade corporates were the best performing sub-sector, as credit spreads benefitted from the same strong earnings reports that drove equities higher. Reversing a five-month trend, spreads tightened by 14 bps and offset the increase in underlying base-rates. The traditional benchmark ended the month with an all-in yield of just under 3.4%.
The Bloombar 1-15-Year Municipal index returned +0.3%, as tax-exempt issues again outperformed their taxable counterparts. The relative steepness of the municipal curve provides a significant roll-down advantage for managers able to extend maturities. Credit risk in BBB-rated issues (e.g. IL & NJ) continues to be rewarded.
The Bloombar US Corporate High Yield index advanced +1.1% in July and is back into positive territory for 2018. The benchmark’s overall spread tightened by 27 bps and the credit curve continues to flatten (CCC vs. BB declining). Unhedged international government bonds were mixed, with developed market issues mimicking the losses experienced in the UST market, even as local currency emerging market debt (+1.9%) recovered somewhat during the month.
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.