Markets in perspective – May 2016 in review
The following is the Russell Investments Chief Investment Officers’ views of themes affecting market performance in March 2016. All data is as of May 31, 2016. Sources and indexes used to represent asset classes can be found in the disclosures at the end of this post.
1. Global economy chugs along
After a weak start to the year, the U.S. economy appears on track for a modest rebound. The European recovery continued. Oil demand was stronger than expected and, thus, pushed crude prices up to $49 per barrel by month end.
2. Weak earnings
The first quarter earnings season was weak globally with S&P 500® companies, for example, reporting an 8% decline in profits. While a significant portion of this earnings soft patch can be attributed to earlier moves in energy prices and the dollar, it has acted as a headwind on global equities, which were effectively flat for the month.
3. Fed talks of tightening; markets listen (kind of)
Details from the Fed’s April meeting showed the Committee thinking seriously about raising rates in June. U.S. ten-year Treasury yields did not move much on the news, but shorter-term rates did, with the market putting the chance of a summer rate hike at greater than 50% by the end of May. The U.S. dollar rose, but remained within its recent range.
1. Cyclical and currency trends reverse
The cyclical trend that started in mid-February reversed in May as the commodity rich regions of Canada, Australia and emerging markets underperformed the U.S. In USD terms, Europe and Japan modestly underperformed the U.S. A higher expectation of rate hikes, rekindled fears of emerging market debt and global growth concerns caused USD appreciation. In local currency terms, Japan, Australia and Europe ex-UK outperformed U.S. large cap as it was the depreciation of Japanese yen, Australian dollar and Euro against the USD for the month that drove these regions to underperform in USD terms. The UK markets and pound were stable despite the looming “Brexit” vote in June.
2. Equity markets reflect increased probability of Fed rate hike
With Fed talks of tightening, investor risk appetite declined. This resulted in defensive outperforming dynamic; growth outperforming value. Factor payoffs were relatively muted in May. Meanwhile, higher quality companies and lower volatility stocks, particularly those with lower leverage, were rewarded.
3. Technology takes over leadership from commodity sectors
May saw continued uncertainty and anxiety help shift investors’ preferences back toward stocks, particularly technology, with long-term momentum. This happened as investors questioned whether the energy and materials sectors had risen too far too quickly and so booked some recent gains.
1. U.S. bond markets react (somewhat) to Fed’s tightening rhetoric
Yields were modestly higher as more Fed members emphasized the possibility of rate hike in June. Longer-term rates were largely unchanged. This signaled market skepticism surrounding the longevity of eventual policy tightening. Across developed markets (e.g. Europe, Japan, Australasia) yields were broadly lower on continued tepid global growth as well as disappointing U.S. corporate earnings and consumer spending.
2. Credit underperforms due to weak U.S. corporate earnings, while high yield outperforms due to strong oil rally
Investment grade corporate credit underperformed modestly as earnings disappointed. However, high yield outperformed as energy companies enjoyed a bounce in oil prices as well as high yield’s inherent spread cushion. Outside the U.S., credit markets broadly followed the U.S. lead with risk assets selling off modestly.
3. Securitized sectors outperform corporate
U.S. mortgage credit, both residential and commercial, benefitted from relatively positive property fundamentals. Agency mortgages also outperformed as investors bid up prices for ‘safer’ assets.
1. Interest rates stay low
U.S. 10-year Treasury yields declined in early May before climbing in response to Fed comments on possible June rate hike. Real Estate Investment Trusts (REITs) modestly lagged global equities due to equity issuance and renewed expectations of rate hikes. Persistently low rates supported U.S. utility outperformance relative to the more cyclical transportation infrastructure sub-sectors. The U.S. dollar responded to rate speculations by appreciating against most major currencies.
2. Oil prices increase again
The WTI crude oil spot price was up another 7% in May. Supply and demand dynamics and the U.S. dollar continue to influence price. Oil and gas pipeline performance in listed infrastructure decoupled from crude price movements. Consequently, the pipeline sector delivered flat returns, which slightly outpaced the overall infrastructure index. More stable energy prices helped equity and credit hedge fund managers.
3. Global economy chugs along
Infrastructure marginally underperformed broader equities in a flat total return environment. However, its year-to-date performance remained well ahead of other equity sector. The returns of REITs varied noticeably by geography. REITs in Asia and emerging markets were down significantly while those in the U.S. and UK were up.
Asset Class Dashboard – May 2016
If, in looking at the May 2016 update of the Asset Class Dashboard, you thought it looked awfully similar to the April 2016 edition, you’d be forgiven. There is very little difference between the 1-year performance of markets in April and May of this year. In May, half of the asset classes had positive 12-month returns, with differences – on the upside – for real assets (Commodities, Infrastructure and Global Real Estate).
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.
Corresponding indexes/sources by section:
• Oil represented by West Texas Intermediate (WTI) crude prices
• Global equities represented by Russell Global IndexEquities
• Australia represented by the Russell Australia Index
• Canada represented by the Russell Canada Index
• Emerging Markets represented by Russell Emerging Markets Index Local
• U.S. represented by Russell 1000® Index
• Developed Europe represented by the Russell Developed Europe Large Cap Index
• Japan represented by the Russell Japan Index
• Defensive represented by Russell Global Defensive Index
• Dynamic represented by Russell Global Dynamic Index
• Growth represented by Russell 1000® Growth Index
• Value represented by Russell 1000® Value Index
• Sectors represented by Russell 1000® Index sectors: Materials, Technology, Energy.
• Broad fixed income represented by the Barclays U.S. Aggregate Bond Index
• European fixed income represented by the Barclays Euro-Aggregate Bond Index
• Japan and Australasia fixed income represented by the Barclays Asian Pacific Aggregate Index
• Investment grade bonds represented by Barclays U.S. Corporate Investment Grade Index
• High yield represented by high yield sector of the Barclays U.S. Aggregate Bond Index
• U.S. mortgage credit represented by Barclays US Securitized indexes
• REITs represented by FTSE EPRA/NAREIT Developed Real Estate Index
• Infrastructure represented by S&P Global Listed Infrastructure Index
• Commodities represented by Bloomberg Commodities Index Total Return
• Oil represented by WTI crude pricesThese views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.
Investing involves risk and principal loss is possible.
Bond investors should carefully consider risks such as interest rate, credit, default and duration risks. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is inherent in portfolios that invest in high yield (“junk”) bonds or mortgage-backed securities, especially mortgage-backed securities with exposure to sub-prime mortgages. Generally, when interest rates rise, prices of fixed income securities fall. Interest rates in the United States are at, or near, historic lows, which may increase exposure to risks associated with rising rates. Investment in non-U.S. and emerging market securities is subject to the risk of currency fluctuations and to economic and political risks associated with such foreign countries.
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Indexes and/or benchmarks 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.
The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market.
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 Global Index measures the performance of the global equity market based on all investable equity securities. The index includes approximately 10,000 securities in 63 countries and covers 98% of the investable global market. All securities in the Russell Global Index are classified according to size, region, country, and sector, as a result the Index can be segmented into more than 300 distinct benchmarks.
Russell Developed Large Cap Index offers investors access to the large-cap segment of the developed equity universe. It is constructed to provide a comprehensive and unbiased barometer for the large-cap segment of this market, and is reconstituted annually to accurately reflect the changes in the market over time.
The Russell Global Large Cap Index measures the performance of the largest securities in the Russell Global Index, based on market capitalization. The index includes approximately 3,000 securities and covers 86% of the investable global market.
Barclays Emerging Market Bonds Index includes fixed-and floating-rate USD-denominated debt from emerging markets in the following regions: Americas, Europe, Middle East Africa, and Asia. For the index, an emerging market is defined as any country that has a long term foreign currency debt sovereign rating of Baa1/BBB+/BBB+ or below, using the middle rating of Moody’s, S&P, and Fitch.
The Russell Emerging Markets 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.
Barclays U.S. Corporate Investment Grade Index: an unmanaged index consisting of publicly issued US Corporate and specified foreign debentures and secured notes that are rated investment grade (Baa3/BBB- or higher) by at least two ratings agencies, have at least one year to final maturity and have at least $250 million par amount outstanding.
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.
Barclays U.S. Aggregate Bond Index is an index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities.
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.
The S&P Global Infrastructure Index provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
Past performance does not guarantee future performance.
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First Use: June 2016