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.
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.
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
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.