Markets in perspective – January 2016 in review

2016-Capital-Markets-Returns-V2 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: Bloomberg 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 Following is Russell Investments’ Chief Investment Officers’ views of the key themes affecting market performance in January 2016. All data is as of January 31, 2016. Sources and indexes used to represent asset classes can be found in the disclosures.

Equity markets

  1. Flight to quality
As fears about Chinese and global growth were re-stoked, equity markets sold off aggressively. In turn, investors took a more risk averse approach, resulting in strong performance for defensive stocks as compared to dynamic ones (average spread of 400 basis points globally). Value vs. growth was not a significant driver of equities while small cap typically underperformed.
  1. Central bank policies
Regional returns responded to increasingly divergent central bank policies and the expectation of slower growth. The U.S. had the highest monthly hedged return of -5%. Europe and Japan were down more, -7% and -8%, respectively. Despite a weak global outlook, emerging markets returned on par with developed markets, returning -6.8% hedged.
  1. Defensive sectors outperform while oil declines
In January, defensives fared the best relatively, particularly consumer staples and utilities, which trumped cyclicals (e.g. financials, materials) where concerns were escalating. Despite oil’s price volatility, the broader energy sector performed better than expected.

Fixed income markets

  1. Flight to quality
In January, the continued oil price decline and renewed concerns in China’s growth drove a credit sell-off. Corporate bonds suffered the most while asset-backed securities, traditionally considered a ‘safe haven,’ outperformed. High yield and energy bonds led the decline once again. Regionally, U.S. bonds underperformed European bonds.
  1. Central bank policies
Given divergent central bank activity, we saw rates fall lower across the globe in January. Drivers included a slowdown in U.S. growth in the fourth quarter of 2015, a surprise rate cut by the Bank of Japan, and its suggestion of further stimulus. In the U.S., yields fell for all but the shortest-dated Treasuries, suggesting lower longer-term growth and inflation expectations. All developed market rates followed suit.
  1. USD near post-Global Financial Crisis highs
The U.S. dollar strengthened moderately in January. Overseas policy easing, weak energy prices, and fears about China put pressure on a number of emerging and developed market currencies. The Japanese yen weakened significantly after the surprise rate cut, while the euro was down only slightly given the European Central Bank’s anticipated dovish comments.

Alternative markets

  1. Volatility continues
Volatility heightened across asset classes allowing for favorable trading opportunities for long/short equity hedge fund managers. China’s weakness weighed on Hong Kong property stocks while lower sovereign bond yields contributed to global Real Estate Investment Trust (REIT) outperformance relative to broader equities.
  1. Central bank policies
Policy divergence continues to be a major theme globally: the European Central Bank and Bank of Japan are committed to monetary easing, while the Federal Reserve seems poised to raise rates further this year although probably not as much as originally expected. In January, the 10-Year U.S. Treasury yield fell by over 30 basis points to below 2%. Not surprisingly, utilities rallied with electric utilities up 3.2% and multi-utilities up 1.5%.
  1. Oil continues decline
In January, crude prices continued to trend lower, down over 9%, although there was a short-covering rally late in the month as speculation that OPEC producers and Russia might agree to cut crude oil production. Interestingly, the pipelines sector within listed infrastructure, which had been highly correlated to oil last year, diverged and returned 1.6% for the month.

Asset Class Dashboard – January 2016

The January reading of the Asset Class Dashboard shows that despite the market volatility in the first trading days of 2016, nine out of the 14 asset classes tracked on the Asset Class Dashboard had historically typical returns for the one year period ending January 2016. U.S. Small Cap, Commodities, Global Infrastructure and U.S. Bonds stand out for falling below their historical typical range of returns for the 12 months ending January 2016. Asset Class Dashboard Jan 2016 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: Bloomberg 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.

All data is as of January 29, 2016.

Corresponding indexes/sources by section:

  • S. represented by the Russell 1000® Index
  • Defensive represented by Russell U.S. Defensive Index
  • Defensive represented by Russell U.S. Dynamic Index
  • Value represented by Russell Global Value Index
  • Growth represented by Russell Global Growth Index
  • Emerging markets represented by the Russell Emerging Markets Index
  • Developed markets represented by the Russell Developed Markets Index
  • Europe represented by Russell Developed Europe ex UK Index
  • Japanese equities represented by the Russell Japan Index
  • Sectors represented by Russell 1000® Index sectors: Consumer Staples, Utilities, Financials, Materials, and Energy
Fixed Income
  • Investment grade bonds represented by Bloomberg U.S. Corporate Investment Grade Index
  • High yield represented by high yield sector of the Bloomberg U.S. Aggregate Bond Index
  • Asset-backed securities and energy represented by sectors of the Bloomberg U.S. Aggregate Bond Index
  • Broad fixed income and U.S. bonds represented by the Bloomberg U.S. Aggregate Bond Index
  • European bonds represented by the Bloomberg Eurozone Sovereign Bond Index
  • Hedge fund strategies data as observed across third party managers by Russell Investments
  • Broad market represented by the Russell 1000® Index
  • Utilities represented by Russell 1000® Index sector
  • 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 prices