Average value lost last month by U.S. funds investing in junk bonds, or debt rated below investment grade, their second-worst monthly performance since November 2011—prompting fears that many once-hot securities could prove hard to sell in an increasingly difficult trading environment.
GIVEN THAT HIGH YIELD SPREADS ARE AT THEIR TIGHTEST, IT MAKES SENSE TO TAKE A MORE ACTIVE APPROACH TO HIGH YIELD INVESTING, AS THE QE PROGRAM COMES TO AN END AND INTEREST RATES ARE POISED TO HEAD HIGHER…
Domestic equity markets posted modest losses in July, after having delivered five straight monthly gains. Global turmoil finally caught up with stock prices, as Argentina failed to meet a deadline for a $539 million interest payment, and geopolitical unrest simmered in many parts of the world. On the positive side, economic data continued to trend well, highlighted this week by the first estimate of second quarter gross domestic product (GDP), which came in at +4.0% – a significant improvement over the -2.9% contraction of the first quarter. Employment gains remained robust in July, with 209,000 jobs added. Even though the gain was slightly below forecast, it represented the first time since 1997 that the economy has had six consecutive months of gains of more than 200,000. The unemployment rate ticked up to 6.2%. Geopolitical tensions continue to grab headlines and cause concern among investors.
Within this landscape, stocks were soft for the month. The S&P 500 declined -1.4% for the month, and is now up +5.7% on a year-to-date basis. The Dow Jones Industrials also dropped -1.4%. The tech-heavy Nasdaq Composite Index slid -0.8% as technology stocks continued to post solid relative results. The Russell 2000 Index of small cap stocks significantly under performed the Russell 1000 Index of large cap stocks, with returns of -6.1% and -1.6%, respectively. Growth stocks fared slightly better than value stocks during the month. In terms of sector performance, telecom services was the strongest performer on a relative basis, gaining +3.7%, while utilities were the poorest performers, posting a decline of -6.8%.
International equity markets were also mostly lower in July, although performance was varied regionally. The MSCI World ex-U.S. Index dropped -1.0% for the month. Emerging markets continued their relative rebound, and outperformed developed markets for the month. The MSCI Emerging Markets Index gained +2.0% for the month. The MSCI EAFE Index, which measures developed markets performance, declined -2.0% for the month. Regionally, China and Pacific ex-Japan were the best performers on a relative basis, with the MSCI China Index and the MSCI Pacific ex-Japan Index gaining +7.3% and +3.7%, respectively. Eastern Europe and Europe were among the poorest performers, with results of -7.8% and -3.8%, respectively.
Fixed-income markets were mostly lower in July, but have still fared relatively well on a year-to-date basis. As has been its custom in every one of its meetings so far this year, the Fed continued its pace of tapering of its asset purchase program during the month, reducing purchases by an additional $10 billion. With this as a backdrop, the benchmark 10-year U.S. Treasury yield ended the month at 2.56%, up four basis points from the 2.52% level of June 30th. Broad-based fixed-income indices were modestly lower in July, with the Barclays U.S. Aggregate Bond Index shedding -0.3% for the month. Global fixed-income markets did not perform as well, with the Barclays Global Aggregate ex-U.S. Index returning -1.4% for the month. Intermediate-term corporate bonds were also lower, as the Barclays U.S. Corporate 5-10 Year Index dropping -0.2%. The Barclays U.S. Corporate High Yield Index posted a loss of -1.3% for the month. Municipals bucked the trend, and posted a gain of +0.2%.