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Monthly Commentary

Qualified Opportunity Zone Funds

By Alternative Investments, Monthly Commentary, Tax Planning


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EWM Macro View-September 2018

By Monthly Commentary

Domestic equities ended mixed for the month of September, as the S&P 500 finished in positive territory, whereas small cap stocks and even several large cap sectors experienced losses. With the continued upward trend for the S&P 500 Index, September brought new record highs for the index, although small caps ended the month in negative territory, falling from record highs set at the end of August. In light of the recent high, it may be worthwhile to reflect on how far stocks have come over the past decade, as September marked the ten-year anniversary of the start of the 2008 financial crisis. It also marks ten years since Lehman Brothers, a 158-year old company, was forced to file for bankruptcy protection, the largest US bankruptcy ever. For context, during the month of September 2008, the S&P 500 Index fell roughly 9% to 1,166. Ten years later, the index has climbed to nearly 3,000. However, the recent high valuations may be giving market participants pause, as they wonder how much longer this bull market can continue, especially as the Federal Reserve (Fed) continues to tighten monetary policy.


As was widely expected in September, the Federal Open Market Committee (FOMC) voted to increase the federal funds target range on overnight rates by 25 basis points, to a range between 2.00% and 2.25%, its third rate increase of the year. The trade wars continue to escalate, with China’s State Council accusing the Trump Administration of being a trade bully, as new tariffs on $200 billion worth of Chinese goods and China’s retaliatory on $60 billion worth of US products went into effect. Negotiations between the two countries have ceased for the time being, after Beijing decided not to send a delegation to Washington.


For the month, the S&P 500 Index and the Dow Jones Industrial Average (DJIA) returned 0.6% and 2.0%, respectively. This brings the year-to-date gain for the S&P 500 to 10.6% and the DJIA return to 8.8%. However, the tech-heavy NASDAQ declined by 0.7%, bringing its year-to-date return to 17.5%. Within domestic stocks, large cap outperformed small cap equities, as the Russell 1000 Index returned 0.4% and the Russell 2000 posted a loss of 2.4%. Mid cap stocks also outperformed small caps, with the Russell Mid Cap Index losing only 0.6%. Growth stocks continued to outperform value, albeit by a much slimmer margin, as the Russell 3000 Growth Index returned 0.3% compared with a flat month for the Russell 3000 Value Index. Sector performance was mixed, with the Telecommunications sector (which now becomes the Communication Services sector) had the best results, a gain of 4.3%, followed by Health Care at 2.9%, and Energy, which gained 2.6%. On the negative side of sector performance, Financials and Materials struggled, producing returns of -2.2% and -2.1%, respectively. The Bloomberg Commodity Index generated solid performance, with a return of 1.9%.


International equities snapped back from losses in August to post slight gains in September, as the MSCI ACWI ex USA Index gained 0.5% and MSCI EAFE gained 0.9%. European Central Bank (ECB) President Mario Draghi reported that the ECB will continue with plans to phase out monetary stimulus as wages and inflation increase. Additionally, Draghi reported that households across the eurozone have experienced their highest growth of disposable income over the last ten years. Although the eurozone economy has slowed slightly over the past year, labor markets remain tight, as some countries and sectors are showing labor shortages, leading the ECB to expect a pickup in inflation. The Brexit negotiations added to uncertainties in the international markets. British Prime Minister Theresa May reported that negotiations are at an impasse, and that Britain stands ready to leave the European Union before a deal is in place. Emerging markets continued to struggle, with a loss of 0.5% (a better return than in prior months), as MSCI Emerging Markets Latin America and MSCI Emerging Markets Eastern Europe added to results. On a year-to-date basis, emerging markets are down 7.7%. Regionally, Japan posted strong results in September, gaining 3.0%, whereas China, which declined 1.4%, continued its poor performance and brought its year-to-date return to -7.5%.


Fixed income experienced some weakness, with mostly negative returns across the asset class for the month of September. Although the Bloomberg Barclays U.S. Aggregate Bond Index fell 0.64% for the month, it had a positive return of 0.02% for the quarter, and declined 1.6% on a year-to-date basis. The yield on the 10-Year Treasury Bond increased by 21 basis points, despite a slight decrease after the Fed increased rates. Corporate high yield posted positive performance, returning 0.6% for the month, and bringing its year-to-date gain to 2.6%. Gross domestic product (GDP) increased at a 4.2% annualized rate over the second quarter, and the Fed estimates that GDP will increase to 3.1% for the full year. The employment figures in August were strong: The unemployment rate held at 3.9%, nonfarm payrolls grew by 201K, and average hourly earnings grew by 2.9%.


Global bonds trailed domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index declined 1.1%, bringing its year-to-date return to -3.0%. Municipal bonds also generated negative returns, and were roughly in line with their taxable counterparts, with the Bloomberg Barclays Municipal Index returning -0.7% for the month. Within the municipal space, the shorter-term securities fared better, with the 1-3 Year Index beating the 22+ Year Index by 64 basis points.

EWM Macro View-August 2018

By Monthly Commentary

The domestic equity market continued to roll right along in August, driven by the Information Technology, Health Care , and Consumer Discretionary sectors. Given the much higher representation of these sectors in the growth indices, it is no surprise that growth outperformed value across the market cap spectrum. The Energy sector was the worst performer  for the month, driven by the falling price of oil from its early August highs. This is the fourth consecutive month of positive returns for the large cap indices and the sixth consecutive month for the small cap indices. Positive earnings reports, particularly in the first half of the month, and a strong GDP report allowed investors to shrug off headlines of increasing trade tensions, weaker-than-expected growth outside of the US, and general geopolitical instability. Valuations remain high, particularly in the large cap space, but most of the managers we spoke to this past month continue to believe the company fundamentals support these valuations.


Small caps, as represented by the Russell 2000 Index, led the way, up 4.3% for the month, whereas the Russell 1000 Index was up 3.4%. As noted, the growth versions of the index  outperformed in August, with the small cap growth index up 6.2% and large growth index up 5.5%. The Bloomberg Commodity Index as a whole was down ̵1.8%, and the Dow Jones U.S. Select REIT Index was up 3.0% for the month.


The international equity markets1 were quite another story, as the EAFE Index was down 1.9%. Uncertainty around Italy’s budget plans (and the subsequent spike in the 10-year Italian government bond), worries over possible contagion from the currency crisis in Turkey, and escalating global trade tensions were all drags on performance. European markets were down 2.8%, with Italy (-9.5%), Spain (-5.9%), and the UK (-4.2%) being the leading detractors. Japan, despite its continued struggle to generate any significant economic growth, was one of the few bright spots, up 20 basis points on the month. The emerging markets were the bigger story during the month, as the MSCI EM Index declined 2.7%. The situation in Turkey intensified in August, as the US announced the doubling of tariffs on Turkish steel and aluminum imports because of the detainment of a US citizen in Turkey. This put further pressure on the stock market, which was down 29% during the month and more than 50% for the year. The Turkish lira also was down 25% in August against the dollar, as the country is running a significant current account deficit, and inflation hit almost 16% in July. Elsewhere, the Latin American markets were down more than 8%, Russia dropped by just under 7%, and Greece declined 10%.

Domestic fixed income markets2 posted modest returns in August, as interest rates fell during the first three weeks before bouncing slightly higher over the last ten days of the month. The yield on the 2-year Treasury Bill ended five  basis points lower, the yield on the 10-year Treasury Note was down ten basis points, and the yield on the 30-year Treasury Bond declined by six basis points. US economic data continued to show strength, but global crises, as noted above, created much higher demand for Treasurys in a flight to safety. Both corporate bonds (+49 basis points) and MBS securities (+61 basis points) underperformed Treasurys (+76 basis points). Higher-quality investment grade corporate bonds outperformed their lower-quality siblings, as spreads widened slightly. Counterintuitively, high yield bonds (+74 basis points) outperformed investment grade corporates , primarily due to the higher coupon income.


The municipal bond market struggled for the first time since April, as muni yields did not fall along with Treasury yields in the first three weeks of the month, but did rise over the last ten days of the month, particularly in the short end of the yield curve. New supply in the municipal bond market remains scarce, whereas municipal mutual funds received steady inflows throughout the month. However, institutional owners (primarily banks and insurance companies) continue to trim their holdings in response to their lowered tax rates. Returns were slightly negative across the first five years of the municipal indices, whereas the 10-year index  was up 31 basis points, and the long maturity (22 years and longer) index was up 41 basis points. High yield munis continued their strong year, up 80 basis points in August and 4.9% for the year.


International developed bond markets  were down slightly during August, with the Global Aggregate Index (excluding US securities) posting a loss of 31 basis points. Falling rates within the core eurozone  were offset by a rise in yields in the European periphery, driven by concerns surrounding the levels of Turkish debt held by Spanish and Italian banks, and Japanese Government Bond yields remained flat. The euro and yen were largely flat versus the US dollar throughout the month; however, the British pound sterling and Australian dollar depreciated, resulting in the dollar-hedged index posting a modest five-basis-point return. Emerging markets bonds  were turbulent during the month, following solid performance in July. Country-specific headlines, most notably in Turkey and Argentina, have fueled a crisis of confidence in  the asset class, with local currency assets taking the brunt of the blow (-6 .1% versus -1.7% for dollar denominated debt, and ̵1.0% for EM corporates). The asset class as a whole has struggled year to date , but many non-US fixed income managers continue to believe the majority of issuers remain fundamentally sound and offer attractive relative value, though they expect the market to remain volatile over the near term.

EWM Macro View-Longest Bull Market in History

By Monthly Commentary

Last week, the S&P 500 bull market became the longest on record, reaching 3,453 days old and outpacing the record bull run that occurred during the 1990s. Although it may seem we are light years away from both the 666 bottom the S&P 500 reached in March 2009 and the market forces that we experienced during the global financial crisis, we should remember we are not too far removed from this historic event. As we prepare to embrace the current record high and the market’s total return gain of more than 400%, let’s take a deeper look at its ride over the past nine-plus years and outline the potential for, as well as the risks of, extending the record.


The term ‘bull market’ is generally defined as a sustained period of a market rise of 20% from a low set at the end of a bear market, which in turn is typically defined as a 20% price decline from a previous high. Based on these definitions, the dates of bull and bear markets can be known only in retrospect. Looking back at the October 2007-March 2009 bear market, there was widespread selling, and the S&P 500 lost more than 50% of its value over the 17-month period.


Although the root causes of the global financial crisis have been debated widely by economists, the bursting of the housing bubble, structural weakness in the financial system, and an economic recession are usually seen as the lead factors. Two high-profile moments from the crisis were the rescue of Bear Stearns in March 2008 and the failure of Lehman Brothers in September 2008, both of which shocked market participants. Another development was the major role the Federal Reserve played: slashing interest rates to near zero, helping to facilitate major bank deals, and using other accommodative measures, including buying trillions of dollars in bonds, to help will the economy out of recession. Much of this accommodative monetary policy still remains in force today, despite several rate hikes over the past two years, and has helped propel and sustain the massive run that we have experienced.


Higher equity values and a prolonged bull market sound great, but is everyone celebrating? Many insiders often describe the current market as the most unloved stock rally in history. Despite strong gains, participants seem to be focused on all the risks and worries that potentially could derail the rally. There certainly has been a lack of euphoria that typically is experienced in bull market tops. Many investors also have kept the 2007-2009 period very close in their rear view. Another issue is that the market gains have been very concentrated, with the Information Technology and Consumer Discretionary sectors accounting for roughly 40% of the market’s gains. Apple has been the largest single contributor, making up roughly 4% of the gains. If investors do not own either these sectors or stocks like Apple, they are not fully participating in this rally, leaving some feeling left behind.


As we mark this milestone period for the longest bull market in history, it is important to remember the ashes markets rose from and also the larger factors that have been driving returns. Potential risks have been apparent in the market since it rose from the 2009 lows, but they have failed to fully overturn the bull. Despite several market pullbacks, the positives, such as strong corporate earnings, positive economic momentum, and monetary accommodation, have vastly outweighed over time the potential challenges of rising interest rates, fears of a global trade war, and other geopolitical events. There is no crystal ball to foretell when the equity rally will end, but for the time being, this record bull market rally remains intact.

EWM Weekly Capital Market Highlights for Week Ended 08/24/2018

By Monthly Commentary


  • Global equity markets were broadly up this week. US markets drifted slightly lower on Thursday, a day after the S&P 500’s bull run became the longest ever. International stocks were up modestly, and emerging markets reversed losses from last week, finishing largely in positive territory.
  • Treasury yields have remained flat this week, with the yield on the key 10-Year US Treasury Note trading near 2.82.
  • Commodities remained relatively flat, with the Bloomberg Commodity Index (the Index) finishing marginally higher after an up-and-down week. Within the Index, oil rose and headed for its first weekly gain in two months, as signs of tightened supply from the North Sea and Middle East surfaced.
  • The US dollar ended the week lower against a basket of major trade partners’ currencies. The dollar fell 0.6% following a speech from Fed Chair Jerome Powell, in which he noted “further, gradual” rate hikes moving forward, given that the economy is “strong” and can handle tighter monetary policy.
  • In other economic news, US jobless claims fell for a third consecutive week. Initial claims, a proxy for layoffs across the US, dropped to 210,000 in the week ended August 18, continuing to hover near historic lows. The unemployment rate fell to 3.9% in July, near its lowest level since April 2000, according to the Labor Department’s latest jobs report.

Click here to download the complete weekly report: EWMWeeklyReview 8.24.18

EWM Macro View-July 2018

By Monthly Commentary No Comments

Domestic equity markets posted strong returns in the month of July, with most of the price appreciation coming in the first two weeks of trading. During the month, markets reached highs not seen since the end of January on news of strong economic data. The unemployment rate declined to 3.9%, the second lowest rate in the last 48 years, and second-quarter US Gross Domestic Product (GDP) grew 4.1%, the highest rate in almost four years. For the time being, it appears that the US’s strong economic activity is overshadowing the very serious concerns of a global trade war, as the Trump Administration aggressively renegotiates trade deals with the European Union and China. Even with valuations near all-time highs, companies are still repurchasing their own stock. Last quarter marked a record, as US companies spent almost $437 billion on buyback plans.

For the month of July, the S&P 500 Index and the DJIA returned 3.72% and 4.83%, respectively, as 83% of the S&P 500 companies reported earnings per share that exceeded expectations. For the first time since February, large cap domestic stocks outperformed small cap equities, as the Russell 1000 Index returned 3.45% and the Russell 2000 returned 1.74%. Mid cap stocks also outperformed small caps, with the Russell Mid Cap Index gaining 2.49%. Value stocks outperformed growth stocks, with the Russell 3000 Value Index returning 3.79% compared with 2.84% for the Russell 3000 Growth Index. Sector performance was strong, with positive returns across the board. The high-end Industrials and Health Care sectors generated returns of 7.32% and 6.61%, respectively, whereas the Real Estate and Energy sectors returned 1.08% and 1.42%, respectively. The Bloomberg Commodity Index, recently the worst-performing asset class for the quarter, incurred a loss of 2.13%.

International equity markets posted weaker results when compared with their domestic large cap counterparts, with the MSCI ACWI ex-U.S. Index returning 2.39% for the month of July. The European Central Bank (ECB) indicated no change to its accommodative monetary policy, pledging to keep interest rates the same for at least another year. Additionally, the potential for a trade war between the US and the European Union seems to have diminished after President Trump and European Commission President Jean-Claude Juncker agreed to work to lower trade barriers between the two trade partners. Both parties promised to forgo placing further tariffs while negotiations are under way. Economic activity continues to be positive, as the International Monetary Fund reported real global GDP growth of 3.64% for the first quarter. Furthermore, the ECB is forecasting real GDP growth to hit 2.4% for 2018. International developed equities and emerging markets equities posted similar returns for the month, with the MSCI EAFE Index up 2.46% and the MSCI EM Index 2.20%.

Fixed income markets produced mixed returns for the month, as longer-term yields trended higher. The yields on the 3-month Treasury Note and the 10-Year Treasury Bond increased, ending the month at 2.03% and 2.96%, respectively, resulting in a further flattening, albeit small, of the US Treasury curve. Despite the strength in GDP, driven by consumer spending and nonresidential business investment, Federal Reserve policy makers are expected to continue their gradual pace of interest rate hikes, with two more in store for the year.

The Bloomberg Barclays U.S. Aggregate Bond Index increased 0.02% for the month, with investment-grade corporates contributing 83 basis points for the month, whereas US government and Treasury securities were down 0.41% and 0.42%, respectively. Global bonds struggled relative to domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index lost 0.17%. However, emerging markets debt was the best-performing asset class within fixed income, returning 2.50%. High yielding fixed income securities posted strong performance, returning 1.09% for the month.

Municipal bonds posted positive returns, and outperformed their taxable counterparts, with the Bloomberg Barclays Municipal Index returning 0.24% for the month. Within the municipal space, the shorter-term securities fared better, with the 1-2 Year Index beating the 22+ Year Index by 20 basis points.

EWM Macro View-June 2018

By Monthly Commentary No Comments

The domestic equity markets posted modestly positive returns for the month of June. Despite positive performance across the board, the theme of heightened market volatility continued, with up and down trading weeks throughout the month. Trade was of particular concern for investors, as President Trump ratcheted up his tariff threats, not only toward China, but other US allies. Outside of the political arena, however, corporate fundamentals and earnings growth expectations remain strong, and many active managers have used the volatility as an opportunity to reposition their portfolios.

Growth generally outperformed value during June, as the Russell 1000 Growth Index was up 1.0%, whereas the Russel 1000 Value Index returned 24 basis points. Similarly, small cap growth outperformed small cap value by 17 basis points. The lone exception was in mid cap stocks, where value outperformed growth by 42 basis points. Small cap stocks slightly outpaced their large cap counterparts during the month, as a stronger US dollar weighed more heavily on large cap companies, which typically generate a larger portion of their revenues overseas. Consumer Staples was the leading sector across the market cap spectrum, whereas Financials and Industrials were laggards. The Energy sector, though essentially flat in June, was the best-performing sector over the trailing quarter, supported by higher oil prices.

Meanwhile, the Bloomberg Commodity Index was down 3.5%, despite the strong performance of crude oil, as precious metals and agricultural commodities weighed on returns. The FTSE NAREIT All Equity REITs Index returned 4.18% in June, making it the best month of 2018 for the broader Real Estate sector. The self-storage (7.0%), data center (6.7%), health care (5.8%) , and retail (5.8%) industries were the best performers during the month.


The international equity markets1  underperformed domestic markets in June, with the developed markets holding up better than emerging markets. The US dollar continued to strengthen against most currencies during the month, acting as a stiff headwind to international equity market returns. Emerging markets currencies were particularly vulnerable, with the Argentine peso falling the most, down more than 13% versus the US dollar. Additionally, trade concerns weighed on returns in June and affected markets around the globe, with China leading the fall and declining more than 5%. Trade tensions extended beyond China as the US threatened other restrictions, such as tariffs on cars imported from the European Union (EU). Political uncertainty in Italy along with the weakness in the euro also hampered results in the euro-zone. During the month, the MSCI EAFE Index declined 1.2%, and the MSCI Emerging Markets Index was down 4.2%.


Domestic taxable fixed income markets2 posted negative returns in June, as Treasury yields rose and credit spreads widened. The Treasury curve continued to flatten, with the Federal Reserve (Fed) raising the fed funds rate another 25 basis points to a target of 1.75%-2.00%, while intermediate and long Treasury yields ended the month only slightly higher, despite moving substantially throughout the month. Economic data remained solid, supported by a strong labor market and healthy consumer sentiment, and second-quarter gross domestic product (GDP) growth estimates are approaching 4%. With a supportive economic growth backdrop and increasing inflation, the Fed telegraphed two additional rate hikes over the remainder of the year.

The Aggregate Index declined by 12 basis points, with investment grade corporates weighing most heavily on returns (down 58 basis points). Credit spreads widened eight basis points to 123 basis points above Treasurys, attributable primarily to a supply-demand imbalance, as issuance rebounded in June with an increase in debt-funded merger and acquisition activity. Foreign demand for US investment grade corporate bonds also has declined due to higher short-term rates and a stronger dollar, which have made the cost of hedging more prohibitive. US high yield spreads remained more resilient than their investment grade counterparts, widening just 1 basis point to end the month at 363 basis points, and the Bloomberg Barclays High Yield Index finished the month up 40 basis points. However, those returns were heavily skewed to the lowest-rated high yield issues, as the BB component of the Index was up just seven basis points, whereas CCC-rated issues were up 1.23% in June.

Municipal bonds outperformed all of the investment grade taxable sectors (with the exception of treasury inflation protected securities (TIPS)) across the maturity spectrum. Short municipals in particular outperformed, as high demand pushed short muni rates lower, even as similar maturity Treasury yields were rising. Across the broad municipal market, the volume of new issuance remained in line with the average for the year, and continued to be met by healthy demand from investors looking to reinvest their June coupons ahead of the issuance slowdown that typically comes in July and August. The municipal market also was supported by a Supreme Court ruling that will allow states to collect taxes from internet retailers, providing an additional revenue source that is certain to be positive for municipal credit fundamentals. 

Outside the US, the strong dollar proved to be a headwind for foreign bond investors during June, as all of the major international bond indices posted negative returns for the month (with the exception of those hedged back to the dollar). European government bond yields spiked during the first half of the month on political concerns in Italy, though ultimately finished the month lower than they began. However, this price appreciation was more than offset by the depreciation of the euro against the dollar, and was a major contributor to the Bloomberg Barclays Global Aggregate Ex-US Index finishing the month down 70 basis points. Emerging markets were particularly hard hit by the strengthening dollar and growing trade concerns, with the local currency market down nearly 3% and hard currency emerging markets sovereigns down 1.2%. Emerging markets corporates faired the best, falling only 37 basis points.


1Unless otherwise noted, returns are for the appropriate MSCI Indices in US dollar terms.

2 Unless otherwise noted, returns are for the appropriate Bloomberg Barclays Indices.

EWM Macro View-April 2018

By Monthly Commentary No Comments

The domestic equity markets were mixed in the first month of the second quarter, but generally ending just either side of breakeven. The two exceptions were the Russell 2000 Value Index, which was up 1.7%, and the Russell Midcap Growth Index, which was down 94 basis points. The indices were driven by the Energy sector in April, as oil prices rose more than 7% in the month and ended near a three-year high. This is particularly true of the value indices, in which the Energy sector makes up a much larger portion. Large cap energy stocks rose more than 9%, and their small cap brethren were up roughly 14%. Such a large contribution to return from a single sector makes it significantly more difficult for managers to beat the overall benchmark. In fact, only 25% of small cap value funds outperformed the benchmark, and the median return for the peer group (including expenses) was roughly 85 basis points, or half of the Russell 2000 Value Index’s return. Conversely, roughly 60% of small cap growth funds beat the Russell 2000 Growth Index’s ten-basis-point return.

After a relatively weak first quarter, even April’s modest returns were good news. The Russell 1000 was up 34 basis points, with the value and growth versions just one basis point on either side. Megacap stocks, as represented by the Russell Top 200 Index, increased by 53 basis points, with the growth component outperforming by roughly 25 basis points. As noted, small caps posted a much wider difference, as the Russell 2000 Value Index outperformed its growth counterpart by 1.6%. The Bloomberg Commodity Index was up 2.6%, but the precious metals component was down slightly. The Dow Jones Wilshire U.S. REIT Index was up 1.5%, after a 4.1% climb in March.

The international equity markets1 rebounded sharply in April and pulled ahead of the US markets on a year-to- date basis. European markets rallied during the month despite an apparently slowing economy. Leading indicators, such as industrial output, construction, and retail sales, all pointed to slowing growth, but markets were able to shake off the disappointing data. Unemployment across the eurozone remained stable at 8.5%, its lowest level since 2008. The outperformance is more remarkable given the rebound in the strength of the dollar. The EAFE Index jumped 2.3%, led by Italy, France, and Spain. The emerging markets underperformed their developed counterparts, as the Emerging Markets (EM) Index dropped 44 basis points. Russia was among the worst performers in any category, down nearly 7.5% for the month.

Domestic fixed income markets2 posted negative returns again in April, as Treasury rates rose 20 basis points in the short and intermediate maturities and 14 basis points for 30-year maturities. Economic data continued to show modest but consistent economic growth, including an increase in hourly earnings in March, slightly higher consumer confidence, and stable-to-falling unemployment. Inflation concerns picked up slightly toward the end of the month, as the Producer Price Index came in slightly higher than expected, whereas the Consumer Price Index hit 2.4% on a year-over-year basis. The US Treasury curve flattened during the early part of the month, as the 2yr/10yr gap narrowed to just 41 basis points, the lowest level since 2008. Issuance in both the corporate and municipal markets remained lighter than last year.

The Aggregate Index declined by 74 basis points, led by the agency mortgage-backed security (MBS) sector, which dropped just 50 basis points. Only the very shortest-maturity indices and the noninvestment grade indices managed positive returns in April. The S&P/LSTA Leveraged Loan Index was up 41 basis points, and the High Yield Index rose 65 basis points. The high yield market was aided by a large exposure to the Energy sector.

The municipal market continued to outperform the taxable market in April. New supply remains scarce, though the new-issuance calendar was more robust in the latter half of the month. The relative strength of municipals came despite significant outflows from retail mutual funds, more than $700 million over the first half of the month, as individuals and corporations withdrew funds set aside to pay taxes. The Municipal Index was down just 36 basis points, whereas the 1-15 Year Index was fell 27 basis points.

The international fixed income markets also fell during April, as the Global Aggregate, excluding US securities, was down 2.3%. Yields on 10-year German Bunds, UK Gilts, and Japanese Government Bonds all ended the month higher, though the increase was less than the increase in the US 10-year Treasury Note. International corporate credits, especially noninvestment grade, performed better, as their higher coupon income created a bit of cushion against rising rates. The biggest drag on performance was the currency component, as the dollar rallied sharply over the course of the month. The dollar hedged Global Aggregate was down just ten basis points. The dollar rally and rise in developed markets yields also triggered a sell-off in emerging markets bonds, particularly local currency bonds. Hard currency EM bonds declined roughly 1.5%, whereas the local currency bonds were down nearly 3.0%.

1 Unless otherwise noted, returns are for the appropriate MSCI Indices in US dollar terms.

2 Unless otherwise noted, returns are for the appropriate Bloomberg Barclays Indices.

EWM Macro View-March 2018

By Monthly Commentary No Comments

Domestic equity markets rallied in the first half of March, but ended the month with heightened volatility, with the major equity indices falling to February’s lows. The first quarter ended in negative territory, as stocks faced downward pressure amid concerns over rising inflation, stretched valuations as we marked the ninth anniversary of the current bull market, and protectionist measures from the Trump Administration combined with a looming trade war with China. For the quarter, the S&P 500 and Dow Jones Industrial Average (DJIA) were down 0.76% and 1.96%, respectively, as February and March selloffs erased all of this year’s earlier gains. Despite the recent pullback and return to volatility, many market participants, citing solid fundamentals, remain optimistic about the near-term prospects. Recent economic reports show strong outcomes from the US economy, with the labor market continuing to strengthen, job gains showing strong growth in recent months, and the unemployment rate remaining low. Additionally, economic activity has been rising at a moderate rate, given the solid growth rates of household spending and business fixed investment.

For the month, the S&P 500 and DJIA returned -2.54% and-3.59%, respectively. Small cap stocks outperformed large cap equities, as the Russell 2000 Index posted a return of 1.29% compared with the Russell 1000’s loss of 2.27%. Mid cap stocks trailed small cap as well, with the Russell Mid Cap Index gaining 0.06%. Value stocks outperformed growth stocks, which is a break in trend from growth’s dominance over value in the past few quarters, with the Russell 3000 Value Index returning −1.54% compared with -2.44% for the Russell 300 Growth Index. Sector performance was mostly negative, with positive returns from only three sectors. Utilities and Real Estate were the strongest performers, returning 3.76% and 3.78%, respectively, whereas Financials was the largest straggler, posting a loss of 4.31%, followed by Materials, with a loss of 4.24%. Year to date, the Information Technology and Consumer Discretionary sectors are the only sectors in positive territory, at 3.53% and 3.09%, respectively. The Bloomberg Commodity Index was down for both the month and quarter, returning -0.62% and -0.40%, respectively, but has outpaced many of the more traditional equity and fixed income asset classes.

International equity markets generated better results when compared with their domestic large cap counterparts, with the MSCI ACWI ex-U.S. Index returning -1.76% for the month of March. Eurozone economic growth remains solid, and the European Central Bank expects the economy to expand in the near term at a faster pace than was previously expected, forecasting real GDP to hit 2.4% in 2018. Both international developed and emerging markets equities experienced a pullback for the month, with the MSCI EAFE Index and MSCI EM Index posting losses of 1.80% and 1.86%, respectively. Regionally, Europe was a top international performer from a relative standpoint, declining only 1.20%, whereas the Pacific region ex Japan was down 4.16%. The MSCI China index was down 3.29% in March but still was able to log a 1.82% gain for the quarter. Within emerging markets, EM Latin America continued to be a strong performer, losing only 0.96%, but maintaining a sizable advantage over its peers year to date, with an 8.02% gain in Q1.

Fixed income markets posted mostly positive returns for the month, as longer-term yields trended lower. The first rate increases for 2018 were implemented in March, as the Federal Open Market Committee (FOMC) voted to hike the fed funds rate 25 basis points to a range of 1.50% to 1.75%. Despite this increase, the yield on the 10-Year Treasury Note decreased, ending the month at 2.74%. This resulted in a flatter US Treasury curve at month’s end, as the yield on the longer 20- and 30-year bonds fell 17 and 16 basis points, respectively, whereas at the shorter end of the curve, the yield on the three- and six-month Treasury notes rose eight and seven basis points, respectively. This rate hike was the first of three or four increases that the FOMC, under new Federal Reserve (Fed) Chairman Jerome Powell, is expected to make in 2018, as the Fed continues to normalize rates in response to favorable economic activity. The Bloomberg Barclays U.S. Aggregate Bond Index increased by 0.64% for the month, but was down 1.46% for the quarter. Global bonds continued to outperform domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index returned 1.43% and 3.62% for the month and quarter, respectively. Similar to their taxable bond peers, municipal bonds posted mostly positive returns, with the Bloomberg Barclays Municipal index returning 0.37% for the month. Within the municipal space, longer-term securities fared better, with the Bloomberg Barclays Municipal Long 22+ Year Index outpacing the Bloomberg Barclays Municipal 1-3 Year Index by 64 basis points. Both the US Corporate Investment Grade Index (up 0.25%) and the US Government Index (up 0.93%) outperformed high yield fixed income, which returned -0.60% for the month.

EWM Macro View-February 2018

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The domestic equity market reminded investors in February that volatility does still exist. The modest weakness in the final week of January turned into a rout over the first few trading days of February, as investors were spooked by data showing the first signs of inflation, including continuing upward wage pressure. This data sent all of the major indices down 7.5%-9.0% by February 8. However, ongoing positive earnings reports, including the significant projected impact of the tax reform bill passed in December, allowed the market to recover a little more than half of those losses over the remainder of the month. Energy was one of the worst performing sectors, as rising US inventories caused oil prices to fall nearly 8.0%. The more defensive segments of the market were also hit hard, particularly the dividend payers and other bond proxies, as interest rates rose sharply during the first three weeks of February. The Information Technology sector had the only positive return for the month, very modest in the large cap space and essentially flat in small caps.


February was the first month since last March that posted a negative return in all three of the major US Indices: the Dow fell 4.0%; the S&P 500 was down 3.7%; and the NASDAQ dropped by 3.7%. Large caps, as represented by the Russell Top 200 Index, were down 3.5% for the month, marginally outperforming small caps (Russell 2000 Index declined 3.9%) and mid caps (Russell Midcap Index fell 4.1%). The growth indices, led by their technology weights, outperformed their value counterparts by 1.8%-2.2%, across the market spectrum. The Bloomberg Commodity Index as a whole was down 1.7% but up 0.7% when the energy component is removed. The Dow Jones Wilshire U.S. REIT Index was down 7.6% for the month.


The international equity markets1 modestly underperformed the domestic markets in February, falling in sync during the first two weeks, but failing to rally nearly as far as the US indices during the latter half. Eurozone GDP growth remains strong, relative to recent history, and has shown signs of expanding beyond the core countries, as recent data from Spain and Portugal were particularly strong. Unemployment continues to fall across the common market as well. Yet the most recent CPI data shows inflation still well below the European Central Bank’s (ECB) target of 2%. Japan also reported the eighth consecutive quarter of positive GDP growth; however, the 0.5% annualized reading was well below the market’s expectation of 0.9%. The EAFE Index declined 3.7%, dragged lower by Greece, Spain, and Germany, all of which fell more than 6.8%. The emerging markets outperformed their developed counterparts, as the Emerging Market (EM) Index was down just 3.3%. Russia led the way, up more than 3.0% for the month.


Domestic fixed income markets2 largely posted negative returns in February, as interest rates rose sharply. Economic data continued to show modest but consistent wage growth, and January’s CPI numbers surprised to the upside. The US Treasury curve steepened slightly during the month, as the yield on the 2-year Treasury note rose 12 basis points, while yields on both the 10-year note and 30-year bond were up 15 basis points. Short-term indices hovered around the breakeven point, but losses increased the further investors moved out the yield curve.


The Aggregate Index (down 95 basis points) was dragged lower by a 1.5% decline in corporate credit, its main driver over the last several years, and both the mortgage-backed security (MBS) sector (down 66 basis points) and Treasury’s (down 75 basis points) also struggled. The non-investment grade indices fared slightly better, as the higher coupons of the High Yield Index (down 85 basis points) partially shielded investors from the rise in rates, and the floating rate nature of the S&P LSTA Leveraged Loan Index created a gain of 20 basis points for the month.


The municipal market continued to outperform the taxable market in February. New supply remains scarce, while municipal mutual funds received substantial inflows in two of the first three weeks. The 1-3 Year Index was up 14 basis points, while the 22+ Year Index was down just 42 basis points. Negative monthly returns, even those as modest as February’s, have traditionally led to substantial outflows from municipal funds. When combined with the presumed seasonal outflows in late March and early April, as individual investors pay their taxes, it would be easy to predict a difficult few months for the muni market. But new issuance averaged less than $5 billion a week in February, and the 30-day forward calendar has remained stable at $9.5 billion, meaning it may take a very significant drop in demand before munis begin to under-perform the taxable market.


The international fixed income markets also fell during February, at least in dollar terms. Yields on German Bunds, UK Gilts, and Japanese Government Bonds all ended the month lower, creating a modestly positive return for the currency hedged version of the Global Aggregate ex-US Index. However, the dollar ended higher against most currencies in February, the first month of appreciation since last October, both wiping out the gain and leaving the unhedged version of the Index down 85 basis points. The dollar also rallied against a broad swath of emerging markets currencies, which weighed on the local currency JP Morgan Government Bond Index (JPM GBI) performance (down 1.0%). Negative performance was even more pronounced for the hard currency JP Morgan Emerging Market Bond Index (JPM EMBI) (down 2.0%), as rising Treasury yields put upward rate pressure on dollar-denominated emerging markets government bonds, which trade at a spread over Treasury’s.