Please find the next blog in our monthly series that provides a review of the prior month’s market data, the state of the economy, and the global financial markets.
Markets maintained risk-on momentum in July, even as the Federal Reserve’s rate cut left investors questioning the degree of certainty around future policy easing. Economic data releases, consumer confidence, and better-than-feared quarterly earnings reports portrayed a relatively stable environment in the US. Manufacturing data in the Eurozone warranted attention, even as the European Central Bank indicated intent to employ monetary policy tools in September to address the economic slowdown. Inflation is a global concern with the world’s major economies generally below 2%. Trade talks between the US and China showed little progress, and a new UK Prime Minister may stoke Brexit-driven volatility.
The Federal Open Market Committee (FOMC) met on July 30th/31st, lowering the Fed Funds rate for the first time since October 2008. Deemed a “mid-cycle adjustment,” this 25 bps cut reduced the targeted range to 2.00% – 2.25% and was accompanied by the immediate end of quantitative tightening. The official statement retained an easing bias with Chairman Powell using the press conference to cite weaker global growth, the impact of trade tensions on business investment, and the potential harm these could have on overall confidence levels as key “uncertainties.” Post-meeting, the Fed Funds futures priced in a nearly 80% chance of at least two additional cuts over the next 12 months.
The initial estimate of 2Q-19 real GDP reported growth at an annualized rate of 2.1% exceeding most expectations. Consumer expenditures were up an impressive 4.3%, and the contribution from government expenditures was the highest in a decade amid fiscal stimulus. Conversely, a decline in business fixed investment, slower inventory growth, and weaker trade detracted from growth. Consensus growth estimates were 1.9% for 3Q-19 and 2.5% for the full year.
In line with expectations, 164,000 new jobs were added in July. The unemployment rate held steady at 3.7% as the labor participation rate increased slightly to 63.0%. Average hourly wages advanced at a year-over-year pace of 3.2%, a modest uptick from the previous reading. The Core CPI index was up 2.1% year-over-year, up slightly from last month. The FOMC’s preferred measure, the Core PCE index, was up 1.6% year-over-year through June.
Solid demand for risk persisted into July, driven almost entirely by a dovish shift in global monetary policy messaging. The S&P 500, which represents large US-based entities, achieved several all-time highs throughout the month. Despite a post-FOMC plunge, it advanced +1.4% for July and is now up +20.2% year-to-date. Performance within the domestic benchmark varied materially by sector. IT led the way at +3.3%, with Communication Services (+3.0%) and Consumer Staples (+2.3%) also solid. Energy (-1.9%), Healthcare (-1.7%), Materials (-0.4%), and Utilities (-0.4%) were the relative laggards. Small cap stocks, as represented by the Russell 2000, continued to trail on a relative basis, but returned +0.6% for the month and are up +17.7% thus far in 2019.
In the broad international developed markets, the MSCI EAFE index declined modestly for the month (-1.3%) but remained up +13.1% year-to-date. Sector returns were quite varied, with Materials (-3.6%), Energy (-3.5%), and Financials (-2.6%) detracting the most, while Consumer Staples (+0.5%), Communications Services (+0.4%), and Health Care (+0.1%) held onto gains. Notable US dollar strength, particularly versus the Euro (given dovish ECB rhetoric) and the British pound (increased potential for “hard” Brexit), created a stiff headwind for US-based investors.
Emerging markets stocks, as represented by the MSCI Emerging Markets index, declined -1.1% in July. The category continued to trail developed market peers on a year-to-date basis despite a respectable total return of +9.5%. The Latin America region produced a small gain for the month. A relative underperformer for much of 2019, given China-related concern, the Asia region surrendered -1.5% for the month and was at +8.2% for the year.
Real estate, as measured by the FTSE EPRA/NAREIT Developed index, was up slightly at +0.4% during the month and was up +15.6% for the year. The Alerian MLP index gave back -0.2% in July but remained up +16.7% year-to-date. The near-month NYMEX oil contract was essentially flat for the month, while gold continued to advance (+0.9%). The broadly diversified Bloomberg Commodity index declined -0.7% for the month and is now up +4.4% for the year.
US Treasury (UST) yields traded in a range-bound fashion throughout July, fully expecting the FOMC to deliver a series of “insurance cuts” to sustain the economic expansion. Despite the announced 25 bps reduction in the Fed Funds rate, the slope of the yield curve bear flattened as short-end rates notched a bit higher (discounting future easing) while longer-term rates declined (seeing less catalyst for inflation). In this environment, the high-quality government bond complex returned -0.1% overall. The commonly referenced 10-year UST yield spent a few days below the psychologically relevant 2% level but ended the month virtually unchanged at 2.02%.
The BloomBar US Aggregate Bond index outperformed risk-free US Treasuries on a duration-matched basis providing another +0.2% in July and pushed year-to-date returns to an impressive +6.3%. Spreads for IG corporates were 7 bps tighter and have now fully retraced May’s sell-off. The mortgage-related securitized sub-sectors also contributed to outperformance. With rates opposing spreads, the benchmark’s yield-to-worst settled just above 2.5%.
The Bloombar 1-15 Year Municipal index returned +0.8% in July. Positive technical demand continued to benefit the category which has now provided year-to-date returns of +5.2% despite modest initial yields. As front-end yields fell sharply, the tax-exempt curve re-steepened somewhat. Still, 10-year municipal/UST ratios of ~76% reflect rich valuations.
With ongoing investor risk appetite, the Bloombar US Corporate High Yield index advanced +0.6% for the month and delivered +10.6% year-to-date. Overall benchmark spreads tightened 6 bps, pushing all-in yields down to just below 5.9%. Global yields (many of which are negative) sank relative to US government bonds, but a stronger US dollar caused unhedged international bonds to underperform. Emerging markets bonds remained strong across categories, as local rates in key countries declined and spreads for both US dollar-based sovereign and corporate issues tightened.
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 an Investment Adviser