Monthly Market Report: July 2020

Government Stimulus Propels Developed Markets

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP®

In the month of July, international developed stock markets returned 2.66%. Canada and the U.S. recorded returns of 5.98% and 5.90%, respectively. The U.K. and Japan lagged the broader market. Year to date returns have bounced back considerably since the March lows. The U.S. market is up 3.30% while Europe ex UK is only down -4.98%. Historic peacetime monetary and fiscal stimulus have helped prop up markets. The European Union passed an $857 billion fiscal stimulus package towards the end of July, with almost half of the stimulus coming in the form of grants instead of loans. The U.S. government is also working on another round of fiscal stimulus ranging from $1 – $3 trillion.

Materials and Utilities Outperform

Materials and utilities both recorded returns of 6.90% in July. Infrastructure and energy lagged other sectors. Information technology continues to lead the way as the products and services of many technology companies were instrumental in helping people and businesses operate normally; however, as improving business fundamentals lag far behind soaring stock prices, valuations are steadily increasing. Healthcare, consumer discretionary, and telecommunications also have positive returns through the year.

Large-Cap Growth Stocks Continue to Outperform

In July, value underperformed growth in the small-cap space and large-cap space. Momentum recorded a gain of 8.31%. Relative valuations between value stocks and growth stocks are at historical highs based on the price to book valuation metric. Growth stocks have held up better this year, but their future earnings may not justify the higher valuations. Momentum and large-cap growth strategies performed well during the past one- and five-year periods.

Emerging Market Small-Cap Companies Continue to Climb

In the international developed markets, value underperformed growth in the large-cap space and small-cap space. Momentum recorded a gain of 5.65% while small-cap emerging market stocks posted a return of 8.44%. Foreign momentum strategies have performed well year to date and over the past twelve months.

Interest Rates to Remain Low

In July, the three-month Treasury bill index returned 0.02% for the month. Interest rates on Treasury bills and money market funds are close to 0%. Savers may face low rates for a long period of time, which will negatively impact retirees and people close to retirement. The CPI decreased by -0.80% through June.

Long-Term Treasuries Continue to Reward Investors

The returns of deflationary hedges were mostly positive for the month. High yield and long-term government bonds returned 4.78% and 4.18%, respectively. Long-term government bonds are up 26.02% year to date. The Bloomberg Barclays U.S. Agg Bond Index returned 1.49% in July. Riskier forms of credit such as high-yield bonds, leveraged loans, and BDCs are still negative for the year.

Gold Price Continues to Climb

Inflation-sensitive investment returns were mostly positive for the month. Gold bullion posted a gain of 11.13%. The Alerian MLP index dropped by -3.55% in July. Gold bullion is up 29.72% YTD, outperforming most other assets. Gold miners have also outperformed as they provide levered exposure to the gold price. Domestic and foreign REITs are still down approximately -20%.

U.S. Dollar Depreciating

Over the past three months, the U.S. dollar depreciated against most major currencies. The Euro notably gained 8.22% versus the U.S. dollar. Over the past year, the U.S. dollar appreciated against most emerging market currencies but depreciated against developed market currencies. The continuation of large U.S. fiscal stimulus packages may weigh on the U.S. dollar in the medium-term to long-term while the government’s inability to control COVID-19 has also depressed rates. The dollar has been ascendant most of the time since the financial crisis.  A depreciating dollar is good news for foreign stock markets and inflation-sensitive investments.

Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.

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