IndexIQ July 2019 commentary
- The S&P 500 index returned 1.44% in July. U.S. small caps followed a similar path as large caps, returning 0.58%.
- Global markets continue to lag the U.S. with the MSCI EAFE returning -1.27%. Emerging Markets fared no better with the MSCI EM index returning -1.22%.
- The U.S. yield curve flattened with Short-Term yields rising more than longer-term yields, resulting in the 2 and 10-year yield spreads narrowing.
- The Bloomberg Barclays US Aggregate bond index was up 0.22% while the US Universal (US Aggregate plus High Yield) index returned 0.30%.
- The Bloomberg Barclays US Short Term Treasury index returned 0.16% while the ICE BoAML US Treasury 20 year+ Index returned 0.19%. The iBoxx Liquid Investment Grade Index returned 0.53% and the iBoxx Liquid High Yield Index was up 0.58%.
- Oil prices fluctuated by +/-4% throughout the month but finished little changed.
- In other commodities, Copper was up +6.18% but Natural Gas fell by -3.25%.
- 7 of the 8 tracked hedge fund strategies performed positively in July. Global Macro was the highest performing strategy in June followed by Equity Hedge. Equity Market Neutral Merger Arbitrage was the only negative returning strategy.
- The first reading of Q2 2019 GDP (gross domestic product), quarter over quarter growth, came in at 2.1%. The prior 3 quarterly GDP growth figures were 3.1% for Q1 2019, 2.2% for Q4 2018 and 3.4% for Q3 2018.
- The June CPI (year over year) report shows soft Headline inflation of 1.6%, down from 1.8% in the prior report. Core CPI remains relatively flat at 2.1% versus 2.0% from the prior report. On a month over month basis, Headline inflation was 0.1% and Core inflation was 0.3% (an increase from the prior month). Soft inflation below the Fed’s target fueled further speculation of a rate cut.
- The most recent PMI manufacturing index reading was up slightly at 50.6 and beat expectations. The ISM fell from the prior month and failed to meet estimates.
- In housing, New Home Sales were up for the month but Housing Starts, Building Permits and Existing Home Sales all fell.
- The Unemployment Rate ticked up to 3.7%. The change in Non-Farm Payrolls recovered to over 200,00 from under 100,000 in the prior month.
- The Conference Board Consumer Confidence indicator jumped up to 135.7 from the prior month’s reading of 121.5.
- The U.S. Federal Reserve June meeting resulted in a decrease in the Fed Funds rate of .25%, the first rate cut since 2008. The upper bound was lowered to 2.25% from 2.50%.
- The Fed statement was more “Hawkish” than the market would have preferred. Investor hopes for further easing in the later parts of 2019 were dashed, at least temporarily.
- Trade war risks and a global growth slowdown have been the key rationale behind a potential Fed cut.
- The ECB has signaled a willingness to continue providing monetary stimulus through rate-cuts and asset purchases.
Don’t fight the Fed proves true again
The U.S. market continued its rebound from its May “spring fever” to reach newer highs on the expectation of a rate cut at the end of the month. While the Fed delivered the 25bp cut, it was viewed as a “hawkish” cut as the post meeting comments did not show a strong bias towards further cuts towards the end of 2019. This disappointed investors and we saw a sharp increase in volatility at the end of the month.
The bond market continues to see an “inverted” yield curve where the 10-year Treasury yield (2.01%) is below the 6-month yield of 2.07%. The intermediate portion of the curve (3-7 years) are even lower with yields ranging from 1.82% to 1.91%. A yield curve inversion is often thought to indicate a higher likelihood of a recession and is being watched very carefully by traders and Fed officials alike.
While employment remains robust, wages have been improving, and consumer confidence remains very strong, concerns over a protracted trade conflict with China and the rising possibility of a “no-deal” Brexit following PM Johnson’s election in the UK are weighing on investor psyche.
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The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.
The MSCI Emerging Markets (EM) Index captures large and mid-cap representation across 24 emerging markets countries.
The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and nonagency). Bloomberg Barclays US Universal Index includes high yield.
The Bloomberg Barclays U.S. Short-Term Treasury Bond Index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity of between 1 and 12 months.
Headline inflation is a measure of the total inflation within an economy, including commodities such as food and energy prices (e.g., oil and gas), which tend to be much more volatile and prone to inflationary spikes. Core inflation is the change in the costs of goods and services but does not include those from the food and energy sectors. This measure of inflation excludes these items because their prices are much more volatile. Soft inflation typically describes attempts by central banks to raise interest rates just enough to stop an economy from overheating and experiencing high inflation, without causing a significant increase in unemployment, or a hard landing.
iBoxx Liquid Investment Grade Index is designed to provide a balanced representation of the USD investment grade corporate market and to meet the investors demand for a USD denominated, highly liquid and representative investment grade corporate index.
iBoxx Liquid High Yield Index consists of liquid USD high yield bonds, selected to provide a balanced representation of the broad USD high yield corporate bond universe.
ICE BoAML US Treasury 20 year+ Index ICE U.S. Treasury Indices are market value weighted and designed to measure the performance of the U.S. dollar-denominated, fixed rate U.S. Treasury market.
The ISM Manufacturing Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.
The Purchasing Managers Index is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment. A PMI of more than 50 represents expansion of the manufacturing sector, compared to the previous month. A reading under 50 represents a contraction, while a reading at 50 indicates no change.
A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
U.S. Treasuries are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.
The Consumer Price Index for All Urban Consumers Ex Food and Energy (Core CPI) is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy, is widely used by economists because food and energy have very volatile prices.
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