February Market Update – strong month for equity investors

Capital Market Returns

Sources: U.S. Equity: Russell 3000® Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Emerging Markets: Russell Emerging Markets Index, U.S. Bonds: Barclays U.S. Aggregate Bond Index, Global REITs: FTSE EPRA/NAREIT Developed Real Estate Index, Commodities: Bloomberg Commodities Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities

Buoyed by improved economic expectations in Europe, non-U.S. equities (represented by the Russell Developed ex-U.S. Large Cap Index) led in February with a return of 6.1%, surpassing U.S. equities (represented by the Russell 3000® Index).

Notably, non-U.S. equities outpaced U.S. equities even despite the continued strengthening of the U.S. Dollar in February. Over the last 12 months, the U.S. Dollar has strengthened by 16% versus a basket of international currencies (based on the difference in returns of the Russell Developed ex-U.S. Large Cap Index in U.S. Dollar and local currency terms in February). In U.S. Dollar terms then it comes as little surprise that U.S. stocks have outperformed non-U.S. stocks for the last 12 months. But, in local currency terms (eliminating the effect of the strengthening U.S. dollar), non-U.S. stocks were up 15.5%. It reveals the  potentially strong return of non-U.S. stocks while also highlighting the impact currency can have in the short-term.

U.S. bonds (represented by Barclays U.S. Aggregate Bond Index) posted negative returns in February, coming in at -0.94%, after having experienced a strong start to the year. Expectations for higher fixed income interest rates amplified and rose slightly, which had negative effects on bond market prices.

Within real assets, global real estate (represented by FTSE EPRA/NAREIT Developed Real Estate Index) was negative for the month after a strong January, but commodities (represented by the Bloomberg Commodity Index), which were up 2.6% in February, rebounded somewhat as oil prices (represented by CLJ15 Crude Oil WTI NYMEX Price Index) rose slightly from their most recent low. Unfortunately, though, even February’s stronger oil prices did little to counteract the 12 months’ oil price deluge.

The hypothetical balanced index portfolio fared well in a month of mixed returns. It returned 2.9% in February and was up a respectable 5.9% on a 12-month return basis, helping to illustrate the value of being diversified and investing in a range of different asset classes.

Asset Class Dashboard – February, 2015

The Asset Class Dashboard portrays the last 12-month market environment as very much “in the typical range” that we would expect in the context of historical returns. Commodities remain the only outlier, coming in below the historically typical range for that asset class. Going forward, we would expect the 12-month return of commodities to be more typical as oil finds its new equilibrium price.

Asset Class Dashboard

Large cap U.S. equity: Russell 1000 Index, Large cap Defensive U.S. equity: Russell 1000 Defensive Index, Large cap dynamic U.S. equity: Russell 1000 Dynamic Index, Small cap U.S. equity: Russell 2000 Index, Non-U.S. Equity: Russell Developed ex-U.S. Large Cap Index, Global equity: Russell Developed Large Cap Index, Emerging markets: Russell Emerging Markets Index, Commodities: Dow Jones – UBS Commodity Total Return Index, Global infrastructure: S&P Global Infrastructure Index, Global real estate: FTSE EPRA/NAREIT Developed Index, Cash: Citigroup 3-Month U.S. Treasury Bill Index, Global high yield bonds: Bank of America Merrill Lynch (BofAML) Global High Yield Index, Emerging markets debt: JP Morgan Emerging Markets Bond Index Plus, U.S. bonds: Barclays U.S. Aggregate Bond Index.

How do I read this chart?

This dashboard is intended as a tool to set context and perspective when evaluating the current state of a sample of asset classes.

The ranges of 12 month returns for each asset class are calculated from its underlying monthly index returns. The stated inception date is the first full month of an index’s history available for the dashboard calculation.

Here is how to read the graphic on this page:

FOR EACH INDICATOR, THE HORIZONTAL BAR SHOWS FOUR THINGS

A GRAY BAR shows the full range of historical rolling 12?month returns for a sample of asset classes.

A BLUE COLOR BAND represents the typical range (one standard deviation away from the mean, i.e. 68% of historical observations) of rolling 12-month returns for these asset classes.

AN ORANGE MARKER represents the most recent 12?month return of the asset classes.

A WHITE LINE within the blue bar represents the mean of the historical observations.

The bottom line

February is the shortest month of the year – and it’s only one month of the year, and only the second one in 2015. So, while it’s important to keep an eye on market developments and their impact on returns, help your clients contextualize this snapshot in time against their long-term goals.

Strategic asset allocation and diversification do not assure profit or protect against loss in declining markets.

Indexes are unmanaged and cannot be invested in directly.

Returns represent past performance, are not a guarantee of future performance, and are not indicative of any specific investment.

Standard Deviation is a statistical measure of the degree to which an individual value in a probability distribution tends to vary from the mean of the distribution.  The greater the degree of dispersion, the greater the risk.

The S&P 500® Index is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500® are those of large publicly held companies that trade on either of the two largest American stock market exchanges: the New York Stock Exchange and the NASDAQ.

The Dow Jones – UBS Commodity Total Return IndexTM was renamed the Bloomberg Commodity Index, effective July 1, 2014.Bloomberg Commodity Index Total Return: Composed of futures contracts on physical commodities. Unlike equities, which typically entitle the holder to a continuing stake in a corporation, commodity futures contracts normally specify a certain date for the delivery of the underlying physical commodity. In order to avoid the delivery process and maintain a long futures position, nearby contracts must be sold and contracts that have not yet reached the delivery period must be purchased. This process is known as “rolling” a futures position.

FTSE EPRA/NAREIT Developed Real Estate Index is a global market capitalization weighted index composed of listed real estate securities in the North American, European and Asian real estate markets.

Barclays U.S. Aggregate Bond Index: with income reinvested, generally representative of intermediate-term government bonds, investment-grade corporate debt securities and mortgage-backed securities.

The Russell 2000® Index measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.

The Russell 3000® Index: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The Russell Developed ex-US Large Cap Index offers investors access to the large-cap segment of the developed equity universe, excluding securities classified in the US, representing approximately 40% of the global equity market. This index includes the largest securities in the Russell Developed ex-US Index.

Russell Emerging Markets Index: Index measures the performance of the largest investable securities in emerging countries globally, based on market capitalization. The index covers 21% of the investable global market.

Russell Investments is a trade name and registered trademark of Frank Russell Company, a Washington USA corporation, which operates through subsidiaries worldwide and is part of London Stock Exchange Group.

Copyright © Russell Investments 2015. All rights reserved.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.

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