Calvert  News & Commentary

Focus on Equities for June 2013

7/11/2013

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By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.

Natalie Trunow, CIO of Equities Natalie Trunow,
CIO, Equities

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Trending in June

  • The return of volatility to equity and bond markets
  • Defensive stocks came back into focus
  • Slow, but steady improvements in employment statistics

 

June 2013 Major Index Returns

S&P 500 -1.34%
Russell 1000 -1.36%
Russell 2000 -0.51%
MSCI EAFE -3.52%
MSCI Emerging Markets -6.32%

Looking Ahead

  • The U.S. economy continues to show modest, but positive improvements
  • Market correction could continue through the summer
  • Equities and cash likely beneficiaries of fixed-income outflows

June marked the return of volatility to equity and bond markets caused by confusion and concerns about Fed stimulative policy in the U.S. Emerging markets and commodities saw their worst selloff in more than a year, prompted by growth and lending fears in China. The Eurozone remained largely out of focus for the month despite renewed bailout tensions in Greece and general macro weakness across the Eurozone's peripheral economies. For the month, most equity markets sold off, with the Standard and Poor's (S&P) 500, Russell 1000, Russell 2000, MSCI EAFE, and MSCI Emerging Markets Indices returning -1.34%, -1.36%, -0.51%, -3.52%, and -6.32%, respectively. Value stocks continued their outperformance against growth stocks. Within the Russell 1000 Index, defensives came back into focus as telecoms, utilities and consumer discretionary outperformed while materials, tech, and energy were the worst performing sectors.

QE Concerns Overshadow Improving U.S. Macro Picture

Despite a broadly improving macro backdrop in the U.S., volatility returned to markets in late June as investors interpreted the Federal Reserve's latest comments on quantitative easing (QE), as an unexpected earlier tapering of Fed purchases of treasuries and mortgage backed securities (MBS), reducing economic stimulus. Although Fed Chairman Ben Bernanke reiterated that any slowdown in the purchase of treasuries and MBS would be entirely dependent on the improvement of macroeconomic data, markets reacted as though the end of QE would come sooner than previously thought. Some market participants focused on the Fed's optimistic economic outlook while others focused in on Bernanke's comments that QE could start slowing as early as late 2013. Profit taking after a healthy double-digit return in the equity market likely played a role in the downturn as well.

The sharp rise in interest rates triggered fears that the housing rebound might stall; however, incoming data continue to look positive. Sales of previously owned homes in the U.S. climbed to the highest level in more than three years in May. Housing starts and permits both remain strong, and prices, as measured by the S&P Case Shiller 20 City Composite saw a 12.05% year-over-year gain in April. While rising mortgage rates do present a potential threat to the housing sector, a modest increase in rates could actually lure buyers into the market who are eager to purchase before rates go higher.

Improving economic fundamentals in the U.S. have led to slow, but steady improvements in the employment statistics. Nonfarm payrolls surprised to the upside in May with 175,000 new jobs created, although the unemployment rate ticked up slightly to 7.6%, partly due to an increase in the labor force participation rate, as fewer job seekers are dropping out of the labor pool. Jobless claims also remain in a five-year downward trend and are now back to pre-crisis levels.

Particularly good equity and housing markets led to a rebound in consumer behavior and attitudes so far this year. Consumer confidence remains high, retail sales continue to grow and inflation remains subdued.

Emerging Markets Rattled By China and Fed

"...the move out of China sent emerging markets
into a free fall along with a number of other
asset classes including precious metals and
other commodities."

Although China hinted earlier in the year that they would crack down on speculative lending, markets were caught off guard when Chinese interbank lending rates spiked unexpectedly in June. The People's Bank of China (PBOC) initially refused to intervene. Coupled with the U.S. Fed statements on QE, and a general uptick in global growth fears, the move out of China sent emerging markets into a free fall along with a number of other asset classes, including precious metals and other commodities.

On the Surface Things Look Quiet in the Eurozone

News out of the eurozone in June was largely overshadowed by moves in the U.S., China and elsewhere. However, problems remain as indicated by the selloff in European equities that more closely mirrored that of emerging markets than that of the United States or Japan. The near collapse of Greek Prime Minister Antonis Samaras' ruling coalition and fears that another Greek bailout could fall through demonstrate how quickly problems in Europe can jump to the forefront despite seeming to be subdued, if not under control. Anticipation of a eurozone recovery remains largely overdone by the consensus. While there are pockets of interesting investment opportunities in Europe, there don't appear to be any compelling short-term catalysts to offset significant negatives in the economic fundamentals in the region.

Outlook

"...a market correction, in the 5% to 10%
range, could continue in the summer of 2013."

On nearly all metrics, the U.S. economy continues to show modest, but positive improvements. The market bounce in late June after the initial selloff indicates that the initial move may have been partially tied to profit-taking and caution rather than a wholesale shift in investor sentiment. That said, a market correction, in the 5% to 10% range, could continue in the summer of 2013. Fiscal drag from the sequester is likely to start subsiding in the second half of 2013. Furthermore, companies are once again eager to reduce earnings estimates for an easy beat on Q2 earnings, and the ever-present fears of a slowing QE will likely remain through year-end and beyond. Investors will also be wary of rising rates, as a modest increase in rates could be positive for both consumers and markets, but an unexpected shift could lead to further selloffs. As rates continue to rise, significant asset flows may start to leave the fixed-income asset class and be redirected to other asset classes with equities and cash being the more likely beneficiaries. That said, the Fed will continue to manage interest rate volatility by continuing its support of a still recovering economy, while appropriately telegraphing the eventual end of QE before reaching its stated target unemployment rate.

This commentary represents the opinions of the author as of 7/11/13 and may change based on market and other conditions. These opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Clavert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information. Calvert may have acted upon this research prior to or immediately following publication. In addition, accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.

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