20 Jun 2023
Central banks part ways
The Federal Reserve just announced that they would hold rates at their current level, while the European Central Bank (ECB) raised rates another 25 basis points (bps) to 3.5%, and China’s central bank cut rates to stimulate the economy. This divergence with central banks in policy reflects vastly different economic conditions around the globe. In the U.S., the economy continues to surprise to the upside, with consumer spending in May coming in at a seasonally adjusted +0.3% versus expectations for a decline of 0.2%, according to the Commerce Department. While, in Europe, the latest data indicates that the Eurozone is in a technical recession, largely thanks to weakness in Germany and Ireland. That reality would seem at odds with a rate hike, but the ECB has been behind the Federal Reserve’s pace of increases and is playing catch up in its efforts to fight inflation. And in China, growth has been weak by their standards, coming in at only a 4.5% annualized rate in the first quarter, with no inflation in sight.
At the mid-point for the month, thanks in part to China’s stimulus efforts, the MSCI China Index is up over 10%, which has helped emerging market equities return just over 7% so far. And in the U.S., small caps have surged by 7.5%, with small value and micro caps doing even better. Despite the recent performance of small caps, work from BCA (and reported by The Daily Shot) indicates that small caps are about as undervalued as they’ve been since the early 2000s.
Large-cap stocks are also enjoying a strong month, up about 6% month-to-date, with smaller names within the index accounting for more of the gains; the S&P 500® Equal Weighted Index has advanced by 6.7%. International developed stocks have kept pace with the S&P so far, returning almost 6%, thanks in no small part to the decline in the U.S. dollar. In local currency terms, international stocks are only up 3.9%. As is the case with small caps, European stocks are, according to Longview Economics, as cheap relative to the S&P 500 as they’ve been for a long time.
June hasn’t been as kind to fixed income as it has been for equities, but lower credit quality sectors like leveraged loans and high yield have made decent gains, returning 1.8% and 1.6%, respectively. Longer-term Treasuries are up almost 0.2%, and investment grade corporates and TIPs are marginally in the black, as the yield on the 10-year has moved slightly higher and the yield curve, measured as 10-years minus 3-months, flattened slightly.
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| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Microcap Equity | Russell Microcap | Measures the performance of the microcap segment of the US equity market. |
| U.S. Small Cap Equity | S&P 600 | Measures the small-cap segment of the U.S. equity market. |
| U.S. Large Cap Equity | S&P 500 | Represents US large company stocks. |
| International Developed Equity | MSCI EAFE | An equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada. |
| Emerging Markets | MSCI Emerging Markets | Captures large and mid cap representation across 24 Emerging Markets (EM) countries. |
| Chinese Equity | MSCI China | Captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips. |
| High Yield Bonds | Morningstar U.S. High Yield Bonds | Measures the performance of USD-denominated high-yield corporate debt. It is market-capitalization weighted. |
| Investment Grade Corporates | Morningstar US Corporate Bond | Measures the performance of fixed-rate, investment-grade USD-denominated corporate bonds with maturities greater than one year. |
| Long-Term Treasuries | Morningstar US 10+ Yr Treasury Bond | Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years. |
| Leveraged Loans | S&P / LSTA U.S. Leveraged Loan 100 | Designed to reflect the performance of the largest facilities in the leveraged loan market. |
| TIPS | Morningstar US TIPS | Represents inflation-protected securities issued by the U.S. Treasury. |
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