Market Update, August 2016
DIS and DAT - Market Update, August 2016
The ultimate authority must always rest with the individual's own reason and critical analysis.
The post-Brexit rally continued into July with the S&P500 gaining 3.65% in the month, bringing the yearly gain to 7.63%. S&P500 has now rallied over 19% from the February lows. The Nasdaq was the best performer of the major US indices as Growth outperformed Value, something that has been a rarity in 2016. July was full of odd occurrences for the equity markets. First the Dow had a nine day winning streak, something that has happened only seven times since 1980. Then the S&P500 had 11 straight trading days of alternating between higher and lower closes, which was the third longest streak on record. And in these 11 days, the index traded in a range of 0.92%, representing the tightest trading range for that length of time since 1970.
Interest rates continue to fall benefitting all Fixed Income sectors. The 10 year treasury yield hit its lowest level ever at 1.365% even as core inflation continues to be above 2.2%. The yield curve continues to flatten with the spread between 10- and 2-year treasury yields ending July at 0.79%. In fact the yield curve hasn’t been this flat since November 2007. Usually a flattening yield curve is indicative of worsening economic conditions but with tightening credit spreads and increasing, albeit a small increase, in GDP, this seems to be investors going further out on the curve reaching for yield.
Commodities, with the exception of metals like gold and silver, had a tough July giving up all of their 2016 gains. Oil re-entered a bear market, falling more than 20% from its May highs. Production continues to come back online as the Baker Hughes rig count has risen for six straight weeks, hitting its highest level since March. Gold and silver continue to perform well with low to negative interest rates around the world.
Falling yields and higher stock market valuations are causing headaches for value minded investors. With US equities fairly valued and record low bond yields, holding current investments while being patient and selective on new purchases would be prudent for this investing environment. International Developed markets look to be the most attractive equity market based on relative valuation.
We appreciate your time and will talk to you again soon,
Reggie McFadden, CFA
Performance review by the numbers
We begin by reviewing past performance of broad areas, which is not indicative of future results.
Index Y-T-D 1 Year 5 year(annualized)
SP 500 7.63% 5.56% 13.40%
SP 500 Value 9.02% 5.79% 12.66%
SP 500 Growth 6.27% 5.28% 14.20%
Russell 2000 Growth 4.84% (5.30)% 10.91%
Russell 2000 Value 11.81% 5.59% 10.13%
Aggregate Bond 5.98% 5.94% 3.51%
MSCI EAFE 0.42% (7.53)% 3.22%
Gold 26.60% 22.18% (3.69)%
XOM 16.01% 16.01% 4.95%
Commodities (0.65)% (22.18)% (16.09)%
SOURCE: Yahoo Finance, Morningstar.com – As of 7/31/2016
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All indexes are unmanaged and an individual cannot invest directly in an index. Index returns do not include fees or expenses. (JPM: Guide to the Markets)
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. This world-renowned index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 Index focuses on the large-cap segment of the market, with approximately 75% coverage of U.S. equities, it is also an ideal proxy for the total market. An investor cannot invest directly in an index (JPM: Guide to the Markets)
The Russell 2000 Growth Index® measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values. (JPM: Guide to the Markets)
The Russell 2000 Value Index® measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values. (JPM: Guide to the Markets)
The MSCI®EAFE (Europe, Australia, Far East) Net Index is recognized as the pre-eminent benchmark in the United States to measure international equity performance. It comprises 21 MSCI country indexes, representing the developed markets outside of North America. (JPM: Guide to the Markets)
The Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indexes that are calculated and reported on a regular basis. (JPM: Guide to the Markets)
The Dow Jones-UBS Commodity Index is composed of futures contracts on physical commodities and represents 22 separate commodities traded on U.S. exchanges, with the exception of aluminum, nickel, and zinc. (JPM: Guide to the Markets)
The spot price for gold bullion is determined by market forces in the 24-hour global over-the-counter (OTC) market for gold. The OTC market accounts for most global gold trading, and prices quoted reflect the information available to the market at any given time. (Ishares)
XOM is the common stock symbol of ExxonMobil Corporation that trades on the exchange