June 2020 Market Commentary
For the third month in a row, global equities rebounded from the notable decline that occurred in March. This was driven by easing of lockdown restrictions across the globe, however at the end of the month, some of economic reopening was delayed as new cases rose in some U.S. states. Within the U.S., small caps outperformed large caps, returning +3.5% versus +2.0%. U.S. equity volatility, as measured by the VIX Index, rose +10.6% to 30.4 – well above the long-term average of ~ 20. Abroad, emerging markets outperformed international developed stocks, returning +6.7% versus +2.7%.
The USD oscillated throughout June and finished down -0.7%. Strong economic data at the beginning of the month, including Nonfarm Payrolls, Retail Sales and the Philadelphia Fed Business Outlook led the currency to depreciate. However, Fed Chairman Jerome Powell stated that there was a “long road” to recovery. That statement, combined with COVID-19 case surges in Texas, California and Florida, led the USD to rally. Additionally, the White House announced potential new tariffs on European Union exports, providing additional support for the safe haven currency.
The U.S. ten-year yield rose one basis point and ended the month at +0.66%. At the beginning of the month, the ten- and two-year spread reached seventy-two basis points, the highest in several months. This was driven by hopes of a quicker economic recovery as strong U.S. employment data was released. During the Federal Reserve meeting mid-month, the Fed signaled that it intends to keep rates low and this led the yield curve to flatten.
The price of crude oil rose +10.7% after the significant +88.4% rally in May. The commodity rallied at the beginning of June on positive risk sentiment and OPEC announcing it would maintain production cuts. Later in the month, the resurgence of COVID-19 cases and the potential for the reintroduction of lockdowns led oil prices to decline. Additionally, prices fell further after a report on June 24th showed that U.S. crude stockpiles rose.
Gold prices increased +3.7% and were supported by the Federal Reserve’s announcement of continued low interest rates and fears of a second wave of COVID-19. The asset reached an eight-year high after certain U.S. states saw a spike in new cases.
Short-Term Market Outlook
Our proprietary leading economic indicator remains in negative territory, however it has improved over the past month. This negative reading is driven by weakness in manufacturing data, hours worked and building permits.
QS Leading Economic Indicator
Our tactical stock-bond model has improved and continues to favor U.S. stocks versus investment grade bonds. This reading was driven by the improvement in the QS leading economic indicator and continued strength in the valuation factor. The valuation factor compares the earnings yield of the S&P 500 relative to the ten-year treasury yield.
In U.S. fixed income, we forecast that investment grade bonds will strongly outperform high yield over the near term, a change in view compared to last month. This is being driven by the increase in U.S. equity volatility month-over-month and the widening in spread between the two asset classes.
We believe that U.S. stocks are positioned to outperform versus their international-developed market counterparts, a similar view compared to last month. Yield curves in other developed markets are flattening at a faster rate than in the U.S., which we interpret as a sign of lower economic prospects abroad and supports U.S. equities. Equity price momentum also prefers U.S. stocks.
European bonds are forecasted to outperform European stocks in our model; however, the strength of the signal has declined since last month. Weakness in European Leading Economic Indicators are continuing to drive the preference for European bonds.
Asset Class Preferences
Asset Class Preferences are based on QS Investors proprietary quantitative factor models. These rules-based financial models use a combination of indicators that analyze asset valuations, investor sentiment, and the broad economy.
*Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI EAFE Gross Total Return Local Index; U.S. Equities represented by the S&P 500 Total Return Index; U.S. Small Cap Equities represented by Russell 2000 Total Return Index; European Equities represented by MSCI Europe Gross Total Return Local Index; Italy Equities represented by MSCI Italy Index (MXIT Index); Spain Equities represented by MSCI Spain Index (MXES Index); Greece Equities represented by MSCI Greece Index (MXGR Index). China Equities represented by MSCI China Net Total Return Local Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; Emerging Market Fixed Income represented by J.P. Morgan EMBI Global Core USD Index.
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.
QSCR-19114 (July 2020)