August 2016 Market Commentary – Hitting a Wall
Data Source: Bloomberg
- Equity markets were flat in August during a relatively subdued environment in contrast to the volatility experienced last August (August 24 marked the 1-year anniversary of the ETF market meltdown).
- Emerging markets outperformed developed markets led by Brazil over improved investor sentiment concerning the political developments leading to positive economic changes. Europe and Japan slightly outperformed the U.S. while small caps outperformed large caps.
- High dividend yielding / low volatility stocks continued their third quarter underperformance. Bond proxy sectors (utilities, telecom, and REITs) dropped 3-6% partly in response to a backup in interest rates which saw the 10-year Treasury yield rise to 1.58% from 1.46% at the beginning of the month.
- However, the MSCI factor indices fared better than the bond-proxy sectors with MSCI High Dividend only down 0.9% for the month while MSCI Low Volatility was only down 0.1% and MSCI USA Momentum down 1.6%. MSCI USA Value led all factor indices with a 1% gain helped by the rally in financials which were up 3.8% for the month.
- Despite the back up in Treasury yields, the broad fixed income market indices were largely unchanged for the month. Barclays Aggregate dropped 0.1% but U.S. corporate credit continues to perform led by U.S. high yield (up 2.1%). Despite the rise in yields, the U.S. yield curve continues to flatten with the 2-10 year spread now at 0.78% suggesting that the markets expect the Fed to move very slowly and gradually in this rate hike cycle.
- This month also saw the return of U.S. dollar strength following Fed official comments at the annual Jackson Hole retreat suggesting that economic conditions could support another rate hike, as early as the upcoming September meeting. The U.S. dollar (DXY) rose 0.52% in August, but rose almost 2% from the intra-month lows following the Jackson Hole comments. Precious metals sold off in sympathy (down 4%) with dollar strength even though commodities were up nearly 2% for the month.
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By: Benjamin Lavine