posted on August 10, 2015 14:34
The stock market had a bumpy ride in July as investors anxiously watched the situation in Greece unfold. Returns across asset classes ended the month relatively strong with both the S&P 500 Index and MSCI EAFE Index (international large cap stocks) up 2.1%. However, weak markets in China and Brazil dragged the MSCI Emerging Markets Index down 6.9%. Bond returns were mostly positive as the 10‐year U.S. Treasury yield slid down to 2.2%. REITs showed some life with a 3.9% gain and commodities dropped 10.6%.
- The initial estimate of second‐quarter real GDP growth was 2.3%. The increase from the previous quarter reflected an increase in exports and consumer spending, while the strength in the U.S. dollar limited growth.
- Inflation (CPI) was up 0.3% for the month of June, bringing the year‐over‐year inflation rate up to 0.2%. Inflation was lifted by rising energy and food prices..
- Job gains in July were in line with expectations at 215,000. The unemployment rate remained unchanged at 5.3%.
- The S&P 500 Index jumped 2.1%, but U.S. small stocks (Russell 2000 Index) fell 1.2%. Large cap sector returns were mixed as utilities and consumer staples gained 6.1%
and 5.5%, respectively, but energy held back the index with a 7.7% decline.
- Developed international large cap stocks gained 2.1% in
July. International small stocks gained just 0.5% but are
up an impressive 11.1% year‐to‐date.
- Emerging markets were slammed with a 6.9% decline. Brazil returned ‐12.2% and China fell 10.8%.
- The 10‐year U.S. Treasury yield slid to 2.2%, down from 2.4% the month prior.
- Bond returns were mostly positive as rates declined. Intermediate‐term bonds returned 0.4% and international bonds gained 1.5%. TIPS were up 0.2%.
- REITs were helped by the decline in rates and gained 3.9% for the month. Commodities dropped 10.6% as energy prices continued to fall.
China's Government Takes Stock
With all the attention on Greece it would have been easy to overlook the news popping up on China. Some of the latest concerns are the high stock valuations, stocks being propped up by the government, and a slashed IMF forecasted growth rate now sitting at only (only!) 6.7% for 2015.
Before getting into specifics, we should note that China has many share classes available to different investors. You may
have seen in the news that China “A‐Shares” recently dropped over 30% in just a three‐week period, but do note that Savant model portfolios currently do not hold any A‐Shares as these shares are traded with restrictions to foreign investors.
China H‐Shares (traded on the Hong Kong exchange) are the shares freely available to foreign investors, and these shares are a part of Savant model portfolios. The MSCI China index (H shares) was down just over 10% in July. So while not quite as steep of a sell‐off, it certainly raises some concerns.
As you might expect, the Chinese government is doing everything it can to try to stop a further decline. Goldman Sachs estimates that the government has spent approximately 900 billion yuan ($147 billion) in just the past two months trying to prop up stock prices, and still has more available
funds for additional market support. While this level of market intervention is relatively rare in developed markets, it is really just another sign of an emerging economy experimenting with policy to help find its way forward in the global marketplace.
But while the government can influence A‐Share stock prices to some extent, it cannot control the H‐Shares because they are traded freely. The market will continue trading these securities on a daily basis to arrive at the most fair price given available public information.
The effect China’s tactics will have in the long term is yet to be seen. Keeping things in perspective, China is only a small slice of Savant model portfolio allocations. Nobody knows what will happen with China going forward no matter how confidently they claim to. International markets have been and will continue to be an essential part of a well diversified portfolio.
Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply
Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch, wsj.com