On the Homefront
Despite some month end weakness, U.S. equities posted gains for June. The S&P 500 added 0.62% while the Dow Jones gained 1.74%. After leading the market higher most of the year, the tech-heavy NASDAQ Composite struggled shedding -0.86%.
As we reflect on the first half of 2017, it has been quite impressive overall. The Dow Jones and the S&P 500 have each added about 9%, while big-cap technology led the NASDAQ higher for a return of 15%. Many attribute the rally to strengthening corporate earnings, improving global economies, deregulation, infrastructure spending, continued support from central banks, and confidence in President Trump implementing his campaign promises of tax cuts.
In the 9th year of a bull market, with popular opinion grounded in the assumption that central banks will do whatever it takes to stimulate economic growth following the 2008-2009 crises, June 2017 may turn out to be a significant month in market history. During June, global stock and bond markets gyrated on comments from multiple central banks hinting of the idea of less central bank intervention. Heads of the European Central Bank (ECB), The Bank of England, and the Bank of Canada raised the prospect of interest rate increases; will these institutions join the Fed in ending the era of ultra-low interest rates and asset purchases? Investors have interpreted these headlines as a shot across the bow that the central bankers believe their work is done and can begin removing their unprecedented aggressive stimulus policies.
In a sign of confidence, the Federal Reserve raised interest rates for the second time in three months. The Fed said it would begin cutting its holding of bonds and other assets this year; to some analyst, this gesture signals the Fed’s confidence in a growing U.S. economy and an improving job market. June 14th, the benchmark lending rate was raised by a quarter percentage point to a target range of 1.00% to 1.25%. According to the forecast released by the policymaking Federal Open Market Committee (FMOC), one more rate increase is expected this year. The 2017 rate hikes have been widely anticipated. More importantly, the Fed provided the blueprint of the plan to reduce its $4.2 trillion portfolio of securities purchased through the quantitative easing programs in the wake of the financial crisis of 2008 and 2009, marking a new chapter for Fed operations.
In comments following the announcement, Fed Chairwoman Janet Yellen said, if the economy performed in line with the central bank’s forecasts, the Fed could begin the program “relatively soon,” which many analysts predict to be in September or October. The Fed intends to communicate their plans to avoid market strains or another 2013 “taper tantrum”.
Astonishingly, even in the face of falling inflation numbers, the Fed still seems committed to removing accommodation. The Fed’s preferred measure of inflation, core Personal Consumption Expenditures (PCE) rose 1.44%--well below the Fed’s 2% target and the lowest level since December 2015. Fed officials lowered their projections for inflation this year, though they still expect price gains to reach their target by the end of 2018. With the unemployment rate running at its lowest level in 16 years, the Fed appears to be brushing off weakening inflation and focusing more on their employment mandate which could impact long-term inflation. Typically, a tight labor market will push up wages leading to higher inflation.
After several months of a steady decline in interest rates, global bond prices reacted negatively to concerns that central banks in the developed world are moving towards less-accommodative monetary policies. On hawkish remarks from the European Central Bank (ECB), the yield on the benchmark 10-year Treasury rose from 2.12% to 2.28% during the last week of the month. Yields on 10-year government bonds in Germany, the U.K., and Canada all closed near levels last seen in March.
International stock benchmarks remained fairly flat for the month of June but posted double-digit percentage gains for the first six months of the year. The MSCI Emerging Market Index posted an 18.55% gain along with the MSCI EAFE Index tacking on a 14.22% gain.
The U.S. Dollar Index continued its slide shedding another -1.50%. The Index is off -6.71% for the year. Investors have noticed global economic growth outpacing U.S. growth, potential rising rates overseas, and more attractive international valuations. The World Bank is forecasting global growth to hit 2.9% next year—up from 2.7% this year, which would be the fastest global economy pace in nearly seven years.
The ECB is joining with the Fed on a movement for added restrictive monetary policies. The ECB hinted toward intent to taper its stimulus program in response to accelerating growth in Europe.
In the June 9th UK Prime Minister election, British voters delivered a setback to Theresa May’s Conservative Party, which raised big questions about Brexit and the prime minister’s future. The defeat deprives the Prime Minister of a majority in Parliament and puts the country back into a period of uncertainty as it prepares to depart from the European Union (EU). The UK election could delay negotiations and may eventually result in a “softer” Brexit or potentially even a whole new vote on exiting the EU. Resulting in a tail risks of a disorderly exit have increased.
In a landmark decision, U.S. index provider MSCI said it will begin adding mainland Chinese stocks to one of its key benchmarks. After having rejected the idea for three years, the decision recognizes the Chinese government working to open its capital markets. According to analysts, the inclusion of Chinese stocks in the widely tracked MSCI Emerging Markets Index could pull more than $400 billion in funds from asset managers over the next decade. The inclusion is expected to take effect in two stages roughly a year from now.
The market experienced some deterioration late in the month as weakness in the technology sector bled into the broader markets and investors grew anxious with the possible wind-down of global central bank intervention. The S&P 500 successfully tested its 50-day moving average, while the NASDAQ Composite violated its 50-day moving average. Value stocks outperformed growth stocks—a reversal from the past few months. This performance could be a sign that investors may begin taking a more defensive approach. For June, Financials and Healthcare were the top performing sectors.
Market breadth is still mostly positive. The S&P 500 Advance-Decline remains near all-time highs and stocks are still trading above their 50-day and 200-day moving averages. However, both indicators are trending lower. The weakness began in the last few trading days of the June, and it will be interesting to see if it follows through as we move further into summer.
2017 is off to a solid start. At this time, the parade of central banks pairing their balance sheets may present the biggest unknown to the markets. To avoid a hard landing, the Fed will have to thread a needle in shrinking its balance sheet while raising rates—a process that has never been attempted before.
The end of “easy” money unleashed by global central banks could test the equity and fixed income markets both domestically and abroad. Stadion will proceed cautiously, following our disciplined investment process to respond to market developments, not attempting to predict them.
Past performance is no guarantee of future results.
An investor should consider the investment objectives, risks, and charges and expenses of the Stadion Funds carefully before investing. The prospectus contains this and other information about the Funds. A copy of the prospectus is available by calling Stadion Funds directly at (866) 383-7636 or Stadion Money Management, LLC, the investment advisor, at (800) 222-7636. The prospectus should be read carefully before investing.
Charts source: Stadion.
The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The Bull Market is a market in which share prices are rising, encouraging buying.
Federal Open Market Committee (FMOC) is the branch of the Federal Reserve Board that determines the direction of monetary policy.
The MSCI Emerging Markets Index is an unmanaged free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
Personal consumption expenditures (PCE), or the PCE Index, measure price changes of consumer goods and services.
One cannot invest directly in an index. All Benchmarks composite data supplied by third party vendors, assumes re-investment of all dividends.
Yield is the annual return on an investment, expressed as a percentage of the price. For stocks, yield is the annual dividend divided by the purchase price, also known as a dividend yield. For bonds, it is the coupon rate divided by the market price, called current yield.
Diversification does not eliminate the risk of experiencing investment losses.
Investing involves risk including potential loss of principal.
Brexit is an abbreviation of "British exit", which refers to the June 23, 2016 referendum by British voters to exit the European Union.
*Performance numbers as of June 30, 2017
Foreign investing involves special risks such as currency fluctuations and political uncertainty.
ALPS is unaffiliated with Stadion Money Management.
The Stadion Funds are distributed by ALPS Distributors, Inc.
An investor should consider the investment objectives, risks, and charges and expenses of the Stadion Funds carefully before investing. The prospectus contains this and other information about the Funds. A copy of the prospectus is available by calling Stadion Funds directly at (866) 383-7636 or Stadion Money Management, LLC., the investment advisor, at (800) 222-7636. The prospectus should be read carefully before investing.
The Stadion Funds are distributed by ALPS Distributors, Inc. An investment in the Funds involves risk, including loss of principal.