Market Update - June 27, 2017Submitted by Jodi Vleck , Beta Wealth Group on June 27th, 2017
For the week ended June 23, U.S. stocks posted modest gains, with small-cap stocks outperforming large-caps. By sector, health care equities led the way with significant gains partly as the market assumed no meaningful negative impact to insurance, pharmaceutical and hospital companies from the regulation-light Senate version of the updated healthcare legislation, followed by gains in the technology sector. Conversely, the energy sector declined nearly 3% on the back of continued weakness in crude oil prices, while financials and utilities both fell 2% paradoxically since both sectors typically move in opposite directions as rates move higher. Trading volumes picked up later in the week mostly due to the annual rebalancing of the Russell equity indices, and since a fair amount of investor assets (both active and passive) are either benchmarked to or passively-managed based on such indices, this makes any changes in composition of such indices relatively meaningful.
Foreign stocks ended mixed with positive returns in Japan and the emerging markets, with the former being helped by dovish central bank meeting minutes and the latter by sharp gains in China driven partly by the likely upcoming inclusion of local 'A shares' into the MSCI Emerging Market and MSCI ACWI (All-World) indices starting in June 2018, which we expect will be a gradual process. On the European and the U.K. front, mixed economic results and the initiation of formal Brexit negotiations caused those markets to lose some ground.
U.S. bonds were mixed as the yield curve ‘twisted,’ with shorter-term and longer-term rates falling, while the belly of the curve in the 5-10 year timeframe was little changed. Government debt and investment-grade corporate credits performed generally in line with each other for the week and outperformed high yield markets, which ended flat. Recent flattening of the yield curve has been driven in part by muted inflation expectations, which have also lowered market-implied probability of future rate hikes this year, and recent declines in the 10-year yield to YTD lows stand in stark contrast to equity market strength. International bonds largely ended the week with negative returns, with emerging market bonds underperforming developed market bonds.
Commodity indexes declined meaningfully on an overall basis, led by further weakness in the energy sector, while precious metals were flat and industrial metals gained several percent. Crude oil officially moved into a bear market (down 20 % year-to-date), as prices fell by over 4% to a tick above $43/barrel by the end of the week, which marked a 10-month low as a continued glut of inventory has prompted a variety of strategists to lower forward-looking forecasts for oil prices.