Market IQ: Review and Outlook on the Markets


Market IQ: Review and Outlook on the Markets

Multi-Asset Strategist

AUGUST 01, 2019

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

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 Forecasts

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.

QSCR18861 (August 2019)