A Strong Bounce Back in Stock Markets
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 02/16/18. Rates and Economic Calendar Data from Bloomberg as of 02/19/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Following the largest weekly decline since 2016, equity markets around the world bounced back with their strongest weekly performance in over 6 years. The S&P 500 Index advanced 4.4%, the Russell Midcap 4.3%, and the Russell 2000 Index, a gauge of the Nation’s smallest publically traded firms, 4.5% in the strongest week for U.S. stocks since December 2011. On the international front, developed markets moved 4.3% higher and emerging markets posted a region best 5.0% gain. Bond yields stabilized last week with the 10 year U.S. Treasury yield settling in at 2.87% as of Friday’s close.
After some fundamental investors pointed to rising inflationary pressures as a justified reason for the market pull back, all eyes were on last week’s Consumer Price Index (CPI) report. The report showed that inflation is indeed firming with consensus beating gains of 0.5% versus last month and 2.1% compared to a year ago. After opening lower following the announcement, markets quickly turned around and ended the day with a 1.3% gain. The rest of the week’s trading pattern followed suit with additional gains on both Thursday and Friday, pushing the S&P 500 Index (+2.5% YTD) back into positive territory for the year.
At this point in the market cycle, investors need to pay attention to their exposure to the various sectors of the stock market as each may respond differently to rising inflationary pressures and higher interest rates. So far this year the divergence in performance among sectors has been notable. Of the eleven GICS sectors, six are positive territory while five are in the red with the results summarized below.
During the initial market turmoil that roiled markets, interest rate sensitive sectors such as utilities, telecom, and REITs sold off giving some credence to the argument that the short term correction was driven by concerns over rising rates. As volatility skyrocketed and the sell-off entered correction territory the following week, a rotation took place with cyclical sectors bearing the brunt of the selling pressure. Finally, in the subsequent recovery that took hold last week, cyclical sectors such as technology, industrials, and financials rewarded investors with market beating returns of 5.9%, 4.7%, and 4.7% respectively.
Investors must make an effort to understand what industries and sectors they own. Mutual funds can be severely over- or under-weight certain areas of the market leading to biases in their respective performance. In addition, the low yield environment we’ve been in over the better part of the past decade has led some to chase yields, further tilting their portfolio to one area versus another. Absent a high conviction view of a certain sector, we at Hennion & Walsh are proponents of a more balanced and diversified approach. If you would like to better understand how your portfolio is exposed to the various areas of the market, please do not hesitate to speak with your Hennion & Walsh Financial Advisor.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.