Monthly Commentary

EWM Macro View-April 2018

By May 4, 2018 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.

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