The Federal Open Market Committee (FOMC) concluded its June monetary policy meeting by maintaining the Federal Funds rate at a range of 0 to 0.25%, and by prolonging its $85 billion per month pace of asset purchases. The Committee announced that they are prepared to increase or decrease the level of asset purchases as necessary. The FOMC added that the downside risks to the economy and labor market have diminished since the fall of 2012.
Federal Reserve Chairman Bernanke said that a majority of the FOMC expects the Federal Reserve not to sell the previously bought assets, but instead let the paper mature or get paid off, potentially changing their exit policy. Bernanke reiterated that the recent decline in unemployment would not trigger a rise in interest rates, but would be strongly considered along with other economic data. An exact timetable for the end of quantitative easing remains uncertain; however, Bernanke has suggested that tapering could begin at the end of this year, with a complete end of bond-buying by the middle of 2014. That being said, if economic growth does not recover, the Federal Reserve could maintain quantitative easing much longer than expected.
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MARKET DATA |
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|
June |
3 Mo. |
YTD |
1 Year |
|
| S&P 500 | -1.50% |
2.36% |
12.63% |
17.92% |
| Russell 2000 | -0.68% |
2.73% |
15.09% |
22.42% |
| NASDAQ | -1.52% |
4.15% |
12.71% |
15.95% |
| MSCI EAFE ($ basis) | -3.72% | -2.11% |
2.18% |
15.14% |
| MSCI EAFE (local) | -3.81% |
0.06% |
8.95% |
21.26% |
| UK (FTSE) | -5.58% | -3.06% |
5.39% |
11.57% |
| Germany (DAX) | -4.67% |
2.10% |
4.56% |
24.05% |
| Japan (NIKKEI) | -0.71% | 10.32% | 32.49% |
51.86% |
| MSCI Emerging Markets | -6.79% | -9.14% | -10.89% |
0.32% |
| Barclays Aggregate | -1.55% | -2.32% |
-2.44% |
-0.69% |
All market data as of the end of June 2013. Quoted index returns are based on month end index prices (in local currency) and do not include dividends.
Following comments made by the FOMC, the U.S. equity markets quickly retreated, and the benchmark S&P 500 Index fell by 1.50% for the month of June. Despite the monthly decline, the S&P still registered its strongest first half of the year since 1999; the index was up 12.63% year-to-date. Economic figures were generally mixed, if not positive, with non-farm payrolls, consumer sentiment, and retail sales all beating market expectations (though GDP was revised lower for the first quarter).
Housing figures also demonstrated continued strength as results for sales, pricing and construction reached multi-year highs. However, some investors have growing concerns that rising interest rates may impact the recent strength in the housing market. Smaller capitalization companies generally outperformed expectations, yet the Russell 2000 Index fell by 0.68% in June. Meanwhile, three out of the ten S&P 500 sectors showed positive performance during the month. Shares in the consumer discretionary, telecom, and utilities sectors all increased, while information technology and materials experienced declines greater than 3.5%.
Fixed income market yields were driven largely by comments from members of the FOMC regarding the potential tapering of its asset purchase program. The yield on the benchmark 10-year Treasury note rose 0.32%, bringing its quarterly yield increase to 0.63%. According to Bloomberg, the recent increase makes the real yield on a 10-year Treasury note (after subtracting the annual inflation rate) to 1.08%, its greatest spread since March 2011. Still, this is only half of the average yield (2.2%) over the past twenty years.
In response to the increase in Treasury rates, the benchmark Barclays Aggregate Bond Index fell by 1.55% in June, adding to losses during the first five months of the year and accumulating a year-to-date loss of 2.44%. In a rising yield environment, fixed income instruments with lower coupon rates and higher durations are the most negatively impacted, as evidenced by the 4.49% decline in the Morningstar Long-Term Corporate Bond Index.
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U.S. ECONOMIC DATA |
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June |
Prior Month |
Beginning of Year |
Prior Year |
|
| 10 year Treasury Yield |
2.48% |
2.16% |
1.76% |
1.65% |
| Gold (London pm fixing per ounce in dollars) |
1224 |
1393 |
1675 |
1599 |
| Oil ($ per barrel) |
96.46 |
91.97 |
91.82 |
84.96 |
| VIX Index |
16.86 |
16.30 |
18.02 |
17.07 |
All economic and market data as of the end of June 2013.
Internationally developed equity markets waned during June; the MSCI EAFE Index fell by 3.72% in U.S. dollar terms. Although registering a 0.71% decline, Japanese shares outperformed other developed markets due to the loose monetary policy, the expectations of a rise in inflation, and the news that the Japanese government would allow the country’s public pension funds to buy more stocks. European markets generally underperformed during the month. Major indices in the U.K., France, and Germany fell more than 4% in response to sluggish economic growth, record low consumer confidence in France, and rising government bond yields. The Bank of England and the European Central Bank left monetary policy relatively unchanged. Despite negative economic reports out of Europe, German retail sales, consumer confidence, and employment rates all surpassed expectations, while European manufacturing demonstrated some month over month improvements.
Meanwhile, emerging market equity markets continued to underperform. The MSCI Emerging Market Free Index dropped 6.79% in June, bringing its year-to-date decline to 10.89%. Chinese equities were pressured mid-month as the interest rate for an overnight loan from one Chinese bank to another briefly spiked to 30%, provoking fears of potential bank defaults. Typically, a central bank will intervene in the market to provide additional liquidity, however the People’s Bank of China decided to wait before providing additional funds. Once the People’s Bank of China intervened, overnight rates fell back into the single digits.
The majority of commodity markets experienced significant declines in June; the Thomson-Reuters Jefferies CRB Index, led by declines in gold and silver, fell 2.2%. Gold continued its recent slump by falling more than 12% to $1224 per ounce. For the quarter, gold fell 23%, marking its worst quarterly decline since 1920, according to Bloomberg. Silver tumbled even further, falling 36% for the quarter. These declines have been attributed to the lack of significant inflation, slowed growth in emerging market countries (despite multiple rounds of quantitative easing), and the idea of potential tapering of the asset purchase program by the Federal Reserve. Oil prices, however, opposed the trend: light sweet crude prices rose 4.9%.
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