International Stocks Continue To Suffer From Trade War Concerns
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 08/03/18. Rates and Economic Calendar Data from Bloomberg as of 08/06/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global capital markets were mixed for the week, as certain areas continued to feel pain stemming from ongoing trade tensions, particularly Emerging and Developed International markets. The S&P 500 Index sputtered to a level of 2,840, representing a modest increase of 0.80%, while the Russell Mid-cap Index gained 0.54%. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, produced returns in line with its larger counterparts returning 0.63%. On the international equities front, developed markets gave up 1.45% last week while emerging markets fell slightly more losing 1.68% while the U.S. Dollar rose 0.40%.
On-going trade disputes have been at the forefront of investor’s minds for most of 2018; it’s practically all that we’ve heard about and will continue to hear about until some semblance of a resolution presents itself. Despite a cascade of promising economic reports, all of which give credence to the notion that the U.S economic foundation is strong, global capital markets continue to move sideways within a fairly narrow range. The pullback in international equities thus far in 2018 as a result of the trade and tariffs tantrum has resulted in even more attractive relative valuations and perhaps even created attractive entry points for investors. While we could also make a bullish U.S. equities case for the second half of the year given the sideways trading activity that has taken place thus far in 2018 on top of a solid and improving economic foundation, selectively adding international equities, at these valuation levels, to a global equities portfolio strategy seems worthy of consideration.
The 10 year U.S. Treasury yield reached 3% last week, marking a 10-week high, before pulling back and ending the week at 2.95%. In order to take a deeper dive into the bond market, let’s look through to its widely recognized benchmark, the Barclays U.S. Aggregate Bond Index. The Barclays U.S. Aggregate Bond Index, often referred to simply as the “AGG”, has held a variation of different titles, such as the Lehman Aggregate Bond Index, since its creation back in 1973. It has essentially served the same purpose since its inception, which is to track the aggregate performance of taxable, investment grade fixed income securities currently trading within the United States. The index includes U.S. Treasuries, Government Agency Bonds, Mortgage-backed Securities, and Corporate Bonds, while excluding Municipal Bonds and Treasury Inflation-Protected Securities due to their differing tax treatment. Many fixed income investors and portfolio managers use the Barclays U.S. Aggregate Bond Index in a similar fashion to the way that equity investors use the S&P 500 Index; to gauge performance and exposure against a diversified basket of applicable securities. We often consider the AGG as our preferred U.S. taxable fixed income benchmark, but we also understand that its composition has changed meaningfully in recent years. In fact, within the last 10 years, the allocation to U.S. Treasuries has ballooned from 22% to 38% of the total index thanks, in part, to a federal debt level that’s rapidly approaching $15 trillion. So, how will these changes affect fixed income investors pursing a passive approach through either index-based mutual funds or exchange-traded funds (ETFs)? The average maturity of U.S. Treasuries has increased, and longer dated bonds are generally more sensitive to changes in interest rates than shorter dated bonds. Treasury Securities comprising 16% more of the AGG index today than they did 10 years means that a passive fixed income investment tracking the AGG may now be more interest rate sensitive, which can be concerning during a rising interest rate environment.
At Hennion & Walsh, we understand the many complexities that an ever-evolving marketplace presents. As a result, having an understanding of the underlying composition of one’s investment portfolio is imperative and we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios. If you would like to learn more about how we are helping clients invest dynamically and consistently with their own goals, investment timeframe and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Adviser
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.