Markets in perspective – July 2016 in review – Bouncing back from June woes

Capital Markets Returns July 2016

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 Commodity Index, Balanced: 30% U.S. Equity, 20% Non-U.S. Equity, 5% EM, 35% Bonds, 5% REITs, 5% Commodities.

After an uncertain and volatile end to the first half of the year due to the UK’s unexpected decision to leave the EU, markets bounced back in July with nearly all major asset classes posting positive returns for the month.

Equities

Despite the uncertainty after the Brexit vote, non-U.S. equities (Russell Developed ex-U.S. Large Cap Index) outperformed U.S. equities (Russell 3000® Index) with a return of just under 5% for the month. This brought the Russell Developed ex-U.S. Index back into positive territory for the year-to-date, which means that all major equity indexes are now positive for the year to date ending July 31, 2016. Emerging markets continued to rally as well with the Russell Emerging Market Index up 4.8% for the month of July. This brings their year to date return to just under 11% and continues their run as the best performing area of the equity markets year to date.

Fixed income

Although U.S. interest rates were mostly unchanged, fixed income had a few wild swings in July as the market tried to determine the impact of the Brexit vote. After starting the month of July at 1.47%, concerns about the negative implications of Brexit pushed the yield on the 10-Year U.S. Treasury Note down to 1.36%. As calm was restored, rates rebounded back to 1.58%, only to close the month relatively unchanged at 1.45%. The Barclays U.S. Aggregate Bond Index rose .63% in July, however Global High Yield Bonds (BofA Merrill Lynch Global High Yield TR Index – hedged) were the top fixed income performer for the month, posting a return of 2.49%.

Real assets

Real assets appeared to be a great source of return in July as Global Real Estate (FTSE EPRA/NAREIT Developed Index) and Global Infrastructure (S&P Global Infrastructure Index) returned 5.02% and 2.76%, respectively. Year to date as of July, global real estate and global infrastructure have been two of the top performing asset classes within the real assets segment, with returns well into the double digits. The only real assets category that failed to post a positive return for the month was Commodities (Bloomberg Commodity Index) which was down -5.11% as the price of oil continued to decline. That said, despite the pullback in July, Commodities are still positive 7.46% for the year to date as of July.

Asset Class Dashboard – July 2016

A strong month of returns for nearly all asset classes tracked in the Asset Class Dashboard moved the 12-month returns higher for most areas of the market during July 2016. As a whole, 10 out of 12, asset classes improved their overall 12-month return with the exception of the more conservative areas of the market, such as Large Cap Defensive U.S. Equity and U.S. Bonds. The most notable movers for the month were Small Cap U.S. Equities and Emerging Markets Equities, both of which moved out of negative territory after readings of -6.7% and -11% on the June 2016 reading of the Dashboard. All asset classes except for cash remain within their historical typical range and all but non-U.S. equities, global equities and commodities are posting a positive 12-month return. The rebound in risky assets in July is a good sign that markets appear to have calmed down and moved on from the initial concerns over the result of the Brexit vote.

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: Bloomberg Commodity 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.

 

The bottom line

Following a volatile end to the second quarter, global capital markets bounced back with strong performance in July turning most asset classes positive for the year-to-date. An investor in a hypothetical balanced index portfolio would have earned a return of 3.69% in the month of July, bringing the year-to-date return of that hypothetical index portfolio up to 7.66%. The market’s rebound in July was a helpful reminder of the potential benefits of staying invested and not over reacting to short-term market volatility.

Disclosures:

These 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.

This material is not an offer, solicitation or recommendation to purchase any security.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

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.

In general, alternative investments involve a high degree of risk, including potential loss of principal; can be highly illiquid and can charge higher fees than other investments. Hedge strategies and private equity investments are not subject to the same regulatory requirements as registered investment products. Hedge strategies often engage in leveraging and other speculative investment practices that may increase the risk of investment loss.

Investments in emerging or developing markets involve exposure to economic structures that are generally less diverse and mature, and to political systems, which can be expected to have less stability than those of more developed countries. Securities may be less liquid and more volatile than US and longer-established non-US markets.

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.

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

Russell Developed ex-U.S. Large Cap Index: Offers investors access to the large-cap segment of the developed equity universe, excluding companies assigned to the U.S. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time.

Russell Emerging Markets Index: Measures the performance of the investable securities in emerging countries globally. Constructed to provide a comprehensive and unbiased barometer for this market segment and is completely reconstituted annually to accurately reflect the changes in the market over time.

Barclays U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: Barclays Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).

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

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.

BofA Merrill Lynch Global High Yield Index: Tracks the performance of USD, CAD, GBP and EUR denominated below investment grade corporate debt publicly issued in the major domestic or Eurobond 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.

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 entity.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

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Copyright © Russell Investments 2016. 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.

Russell Investments Financial Services, LLC, member FINRA (www.finra.org), part of Russell Investments.

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