Market Update - July 5, 2017Submitted by Jodi Vleck , Beta Wealth Group on July 5th, 2017
For the week ended June 30, U.S. markets lost ground across most broad indices led by the Nasdaq, with large cap names suffering, while small cap companies eked out a modest gain. By sector, financials led the way with a 2% gain as stress tests for most large U.S. banks were largely positive, with most of them getting the go-ahead to return more capital to shareholders via dividends and share repurchases. The prevailing theme of the week however was global central bank commentary alluding to the end of the cheap money era, and foreshadowing an era of rate hikes by the Bank of England and the end of bond buying by the ECB, in addition to further Federal Reserve rate hikes locally. Tech, by contrast, lost nearly 3% on a continued round of apparent profit-taking for the sector that started in mid-June, while bond proxies such as Telecom and Utilities lost 1-2% in an acknowledgment of an environment of higher rates. On the economic front in the US, weaker durable goods orders and pending home sales overshadowed strong consumer sentiment data.
Foreign stocks were mixed, which when coupled with a 2% decline in the dollar for the week, affected net returns. The U.K. and Europe lost ground in local currency terms, due to hawkish central bank commentary which alluded to stronger growth, however these losses were tempered by the weaker dollar. In Japan, we saw the reverse scenario as the yen weakened, thus turning flat local currency returns into a decline in these markets in U.S. dollar terms. Emerging markets ended the week slightly lower, with select emerging markets such as Brazil, China and Russia being aided by a recovery in oil prices, which have been on a noticeable downdraft this year.
U.S. bonds generally fared poorly, as interest rates increased across the yield curve in keeping with global central bank comments surrounding a shifting sentiment toward monetary tightening. Investment-grade credit and government debt performed in similarly negative fashion; high yield bonds experienced gains, aided by a recovery in energy prices. Foreign bonds were flattish to lower on the week, hampered by more hawkish central bank commentary which pushed key rates higher. In emerging markets, local currency bonds were helped by a weaker dollar, while USD-denominated debt lost ground in line with developed market debt.
Real estate markets declined in both the U.S. and abroad, consistent with a move toward higher rates. The year’s bigger losers, retail and regional mall REITs, were the sole gainers on the week, while health care and residential REITs lost the most ground. Commodity indices gained sharply during the week, led by a recovery in energy, with crude oil rising over 7% to over $46/barrel on reports of U.S. rig counts declining for the first time in 24 weeks.