Volatility Returns in August thanks to Turkey and Trade Tensions
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 08/17/18. Rates and Economic Calendar Data from Bloomberg as of 08/20/18. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Volatility returned to global equities markets in a meaningful way over the past week, but appears to have only had a negative effect on Developed International and Emerging Market equities, leaving U.S. equities essentially unscathed. The S&P 500 Index pushed ahead to a level of 2850, representing a gain of 0.66%, while the Russell Midcap Index gained 0.80% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, followed its larger counterparts returning 0.40%. On the international equities front, developed markets decreased 1.10% while emerging markets fell to a 12-month low, declining by 3.69%. Finally, the 10 year U.S. Treasury yield sustained a level of 2.87%, while the U.S. Dollar essentially followed suit giving up a modest 0.05%.
Historically, the month of August has been burdened with elevated levels of volatility. Examples include a Russian default in August of 1998, the sub-prime mortgage crisis in August of 2007, the downgrading of U.S. Sovereign debt in August of 2011, and the S&P 500 flash crash in August 2015. While not all of these volatility shocks lead to a global economic recession, each was – at least temporarily – felt by markets globally. A financial crisis in Turkey, in addition to lingering trade war concerns (with China in particular), appear to be the main culprits of market volatility thus far in August 2018. As it currently stands, Turkey has to contend with a local currency that has depreciated 40% over the last year, an inflation level as high as 16%, and 10-year sovereign debt yielding a dangerously high level of 21%. This steep cost of debt, coupled with a significant loss in purchasing power, is naturally weighing on the country’s ability to meet funding requirements and service the interest on their existing debt. Nonetheless, we do not believe that Turkey’s economic complications have the potential to create wide-spread contagion in the way that the aforementioned shocks did. In fact, Turkey’s limited trade and financial linkages to the U.S. should insulate U.S. markets from sustained and elevated volatility levels.
Although we vehemently believe that current concerns surrounding Turkey are fairly isolated to international markets, downside risks and economic uncertainties still remain. With that said, portfolio diversification becomes increasingly important during times of heightened uncertainty, 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, 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.
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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.
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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.