Market Commentaries

  • Investors Get Defensive as Volatility Persists


    Market Overview


    Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 05/17/19. Rates and Economic Calendar Data from Bloomberg as of 05/17/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.

    Happening Now                   

    Global equity markets, for the most part, declined for the second consecutive week, albeit not quite to the extent of the prior week. In the U.S., the S&P 500 Index and the Dow Jones Industrial Average lost 0.69% and 0.61% respectively while the tech-heavy NASDAQ dipped 1.22%. On the international equities front, developed markets turned in a positive 0.23% return as measured by the MSCI EAFE index. On the other hand, the MSCI Emerging Market Index lost 3.55%, which shouldn’t be too surprising as China makes up over 30% of this index. Treasury yields continued their descent as prices rose with the 10 year U.S. Treasury closing the week with a yield of 2.39%.

    Stocks fluctuated throughout the week as interviews, reports, and even tweets regarding U.S. – China trade negotiations took the spotlight. We’ll choose not to focus on these issues in this update, although we certainly recognize the significance and potential implications of a potential longer term trade war.

    Moving back to the U.S. stock market, earnings season is coming to a close for the first quarter of 2019. All in all, the results have been encouraging. A strong majority of companies beat expectations and we believe that the ongoing trade issues between the U.S. and China have kept a lid on potential gains throughout the season. There are several positive outtakes from earnings season. These outtakes, along with a more dovish Federal Reserve, should lend to more upside potential for the stock market if/when some progress is reported on the trade and tariffs front.
    Moving forward, investors may be interested in the identification of potential opportunities in the stock market for the remainder of 2019. From a sector lens, year-to-date in 2019, all 11 GICS sectors remain in positive territory. Technology, Communication Services, Real Estate, and Consumer Discretionary have led the way although last week told a different story. There was a clear flavor for perceived “defensive” sectors as Real Estate, Utilities, and Consumer Staples were 3 of the 4 sectors with positive weekly gains. Fund flows tend to steer towards that direction when volatility persists. However, we would caution investors that sectors can become overvalued and short-term sentiment can change quickly. Based on our research, we see Utilities and Consumer Staples overvalued from both a current and forward P/E standpoint.

    Instead of just focusing on defensive sectors, it may benefit certain investors to seek out high quality companies, at times regardless of sector, in the face of what we see as a slowing economy that may eventually turn into a recession down the road. We consider quality companies as those that generally have strong and stable balance sheets, low levels of debt, consistent earnings or even growing earnings, above average return on equity, and relatively low volatility.

    With this in mind, we encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolio through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.

    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.
    China Trade
    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.

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