Benchmark Review & Monthly Recap, July 2018

A strong corporate earnings tailwind combined with favorable economic data helped to offset trade tensions and a correction in global technology stocks ushering in a solid start to the second half of 2018 for stocks. The Dow, which gained 4.8%, outperformed both the S&P 500 and the tech-heavy NASDAQ. However, those two indices still showed positive returns for the fourth consecutive month, returning +3.7% and +2.2%, respectively in July. In a change of trend, value stocks outperformed growth stocks for the month.

On the international side, trade tensions dominated headlines for the month, but international equities were able to make some progress in July after struggling through the first six months of 2018. The MSCI ACWI ex USA Index, a measure of developed international equities, was up 2.4% and the MSCI Emerging Markets Index increased by 2.3% in July. Not only have trade tensions had a negative impact on international equities year to date, but a strong U.S. dollar has been an additional headwind to international results. Gains in July were a welcome change for these two indices, which are still both in negative territory year to date.

Fixed income indices were more mixed in July. The 10-year US Treasury yield was 12 basis points higher at the end of July at 2.97% compared to June’s close. This rise in interest rates put the most pressure on longer-dated U.S. Treasuries, which declined during the month. The U.S. Treasury Index declined by 0.4% and Municipals rose modestly by 0.2%. Fixed income investors continued to be rewarded for taking on credit risk as the Bloomberg Barclays U.S. Credit Index gained 0.7% and the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index posted a positive 1.1% return in July, one of the clear standouts in fixed income during the month.

Federal Reserve Chairman Powell provided his semi-annual monetary policy testimony to Congress during the month. In his testimony, he confirmed forward guidance through a gradual tightening cycle, basing his outlook on a strong labor market, inflation near the Fed’s 2% target, and balanced risks to the Fed’s outlook. Markets comfortably digested his guidance and are still anticipating two additional rate hikes in 2018.

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EQUITY MARKETS

Domestic equity indexes were resilient in July with both the S&P 500 and Dow Jones Industrial Average posting their biggest monthly gains since January 2018, a sign this current bull market may still have more room to run. Volatility dropped during the month with the VIX Index finishing July at 12.8 compared to 16.1 at the end of June. A strong corporate earnings tailwind combined with favorable economic data helped to offset trade tensions and a correction in global technology stocks and propelled the major U.S. equity indices higher to begin the second half of 2018. The leader of the domestic indices in July was the Dow at +4.8%. Both the S&P 500 and the tech-heavy NASDAQ showed positive returns for the fourth consecutive month, returning +3.7% and +2.2%, respectively.

Large cap stocks outperformed both mid and small cap stocks in July, with the Russell 1000 Index returning +3.5%, outstripping the Russell 2000 Index’s return of +1.7%, the Russell 2500 Index’s return of +1.9%, and the Russell 3000 Index’s return of +3.3%. All ten S&P sectors finished the month on a positive note. July saw a reversal between value and growth styles with value outperforming after several years of outperformance by growth. For the month, the Russell 1000 Value Index returned +4.0%, outpacing the Russell 1000 Growth Index’s return of +2.9%. Growth, however, still holds the clear advantage on a year-to-date basis.

International markets rallied at the end of July as trade tensions began to thaw between the U.S. and Europe as both sides came to a preliminary agreement to reduce tariffs on non-auto industrial goods. Conversely, tensions between the U.S. and China seemed to sharpen during July with more trade-related rhetoric and a threat of additional tariffs on $200 billion of Chinese goods from the Trump administration. Overall, this led to a backdrop that saw the MSCI ACWI ex USA Index, a measure of developed international equities, gain 2.4% and the MSCI Emerging Markets Index increase by 2.3% in July, after both indices struggled through the first half of 2018.

FIXED INCOME MARKETS
The 10-year U.S. Treasury yield finished July higher at 2.97% compared to 2.85% the prior month. Federal Reserve Chairman Powell’s semi-annual monetary policy testimony to Congress during the month had minimal impact on the market. In his testimony, he confirmed forward guidance through a gradual tightening cycle, basing his outlook on a strong labor market, inflation near the Fed’s 2% target, and balanced risks to the Fed’s outlook. With this backdrop, returns were rather mixed for most fixed income indices. The Bloomberg Barclays U.S. Aggregate Bond Index and the Bloomberg Barclays U.S. Credit Index gained 0.02% and 0.7%, respectively in July. U.S. Treasuries were among the hardest hit fixed income indices during the month due to the rising rate environment. Longer-date Treasuries suffered the most. The Bloomberg Barclays U.S. Aggregate Corporate High Yield Index, gained 1.1% in July, which led fixed income indices. High yield bonds have posted positive year-to-date returns and have been one of the best performing fixed income asset classes in 2018 as investors continue to be rewarded for taking on credit exposure during this current economic expansion.

ECONOMIC DATA

In economic data, the first reading of second quarter GDP was +4.1%, the strongest reading in the past four years. Primary drivers of the positive GDP results included an increase in consumer and business spending. The report was also aided by an increase in net exports, mostly stemming from front-loading of agricultural products ahead of potential upcoming tariffs. Durable goods orders rebounded but were lower than expected. In housing, both existing and new home sales were below the prior month’s pace and below expectations.

The June employment report, which showed 213,000 non-farm payroll additions, was ahead of consensus expectations, which called for 195,000 gains. The unemployment rate moved up to 4.0% from 3.8%, as the labor-force participation rose to 62.9% from 62.7%. Average hourly earnings, which have been closely watched in recent months as the labor market tightens, rose less than expected. The June ISM manufacturing index was 60.2, up from 58.7 in May and better than the 58.5 consensus estimate.

Fed Chair Powell’s semi-annual monetary policy testimony to Congress confirmed the Fed’s forward guidance and a gradual tightening cycle. His commentary cited a strong labor market, inflation near the Fed’s 2% target, and balanced risks to the Fed’s outlook. His testimony didn’t change expectations as markets are still anticipating two additional rate hikes in 2018. We continue to expect a slow paced and measured rate-hike cycle.

Event Period Estimate Actual Prior Revised
ISM Manufacturing Jun 58.5 60.2 58.7
ISM Non-Manf. Composite Jun 58.3 59.1 58.6
Change in Nonfarm Payrolls Jun 195k 213k 223k 244k
Unemployment Rate Jun 3.8% 4.0% 3.8%
Average Hourly Earnings YoY Jun 2.8% 2.7% 2.7%
JOLTS Job Openings May 6,620 6,638 6,698 6,840
PPI Final Demand MoM Jun 0.2% 0.3% 0.5%
PPI Final Demand YoY Jun 3.1% 3.4% 3.1%
PPI Ex Food and Energy MoM Jun 0.2% 0.3% 0.3%
PPI Ex Food and Energy YoY Jun 2.6% 2.8% 2.4%
CPI MoM Jun 0.2% 0.1% 0.2%
CPI Ex Food and Energy MoM Jun 0.2% 0.2% 0.2%
CPI YoY Jun 2.9% 2.9% 2.8%
CPI Ex Food and Energy YoY Jun 2.3% 2.3% 2.2%
Retail Sales Ex Auto and Gas Jun 0.4% 0.3% 0.8% 1.3%
Industrial Production MoM Jun 0.5% 0.6% -0.1% -0.5%
Building Permits Jun 1330k 1273k 1301k
Housing Starts MoM Jun -2.2% -12.3% 5.0% 4.8%
Leading Index Jun 0.4% 0.5% 0.2% 0.0%
Existing Home Sales Jun 5.44m 5.38m 5.43m 5.41m
New Home Sales Jun 668k 631k 689k 666k
Durable Goods Orders Jun P 3.0% 1.0% -0.4% -0.3%
GDP Annualized QoQ 2Q A 4.2% 4.1% 2.0% 2.2%
U. of Mich. Sentiment Jul F 97.1 97.9 97.1
Personal Income Jun 0.4% 0.4% 0.4%
Personal Spending Jun 0.4% 0.4% 0.2% 0.5%
S&P CoreLogic CS 20-City YoY NSA May 6.4% 6.5% 6.6% 6.7%
P = Preliminary, T = Third, F = Final
Source: Bloomberg

Click here for a PDF of Glenn Dorsey’s Monthly Recap

Past performance is not indicative of future results. This is not financial advice or an offer to sell any product. Clark Capital Management Group, Inc. reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. It should not be assumed that any of the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of the securities discussed herein. Clark Capital Management Group, Inc. is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Clark Capital’s advisory services can be found in its Form ADV which is available upon request. Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed. Nothing herein should be construed as a solicitation to buy, sell or hold any securities, other investments or to adopt any particular investment strategy or strategies. For educational use only.

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