July 2019 Market Commentary
Global equity markets had mixed performance in July, after a robust rally in June. U.S. large cap posted the highest return out of the major global equity regions, returning +1.4%, and reached an all-time high. U.S. small cap rose a marginal +0.6%; this came after a strong month of June where the asset class returned +7.1%. U.S. equity volatility, as measured by the VIX index, modestly rose +6.9% and ended the month at the 16.1 level. Abroad, developed outperformed emerging markets, returning +0.7% and -0.9%, respectively.
The U.S. dollar rose +1.8% and was the best performer out of the G10 currencies. This was a large rebound versus the prior month, where it was the worst performing G10 currency. The currency was supported by strong U.S. economic data (ISM Manufacturing, non-farm payrolls) and rising concerns around global growth, weakening the other G10 currencies relative to the U.S.. At the end of the month, the U.S. Federal Reserve cut interest rates for the first time in eleven years¹, lowering its target rate by twenty-five basis points. Chairman Jerome Powell stated that it was a “mid-cycle adjustment to policy”; this was considered less dovish than the market anticipated and boosted the USD.
In the U.K., Boris Johnson was elected Prime Minister and promised to lead the U.K. out of the European Union by the end of October “no matter what”. This rhetoric sparked concerns around a hard Brexit and led to the GBP reaching a multi-year low versus the USD.
Crude oil had a relatively muted month, finishing with a negligible +0.2% gain. Crude oil was supported by the news of an extended supply reduction from OPEC. However, this was offset by a weak global demand outlook and the U.S. announcing that Iran was ready to enter negotiations over its missile program, easing concerns around supply risks tied to Iran.
Gold rose +0.9% and reached a multi-year high; supported by fears of a global cyclical downturn and geopolitical tensions in the Strait of Hormuz. After Chairman Jerome Powell gave his speech announcing the Fed rate cut, which the market interpreted as less dovish then expected, gold sold off and moderated returns for the month.
Source: Bloomberg and ¹J.P. Morgan.
Market Outlook for August
Our proprietary leading economic indicator remained in positive territory. This view is supported by global trade data and the change in initial unemployment claims.
QS Leading Economic Indicator
Our outlook for U.S. stocks outperforming investment grade bonds remains in positive territory. Valuation, as measured by comparing U.S. equities earnings yield to the ten-year treasury yield, continues to be the largest driver of this preference, as the factor’s strength ranks in the top quartile on a historical basis.
In U.S. fixed income, we forecast that high yield bonds will outperform investment grade bonds over the next month. This is supported by the yield differential between high yield and investment grade and the level of U.S. equity volatility.
We strongly believe that U.S. stocks are positioned to outperform their international developed market counterparts. The model’s preference is driven by stronger price momentum in the U.S. and yield curve dynamics. 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. However, options market data, for the first time this year, shows greater demand for price protection in the U.S. versus international-developed markets.
European stocks are forecasted to outperform European bonds in our model, however this has moderated over the past month. Four of the six explanatory variables in our model point to this conclusion, including European stock price momentum, valuation, and European government yields.
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.
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QSCR18861 (August 2019)