MONTHLY MARKET REPORT: January 2018

Prepared by Brandon Yee CFA® and Thomas Connelly CFA®

 

Commentary

Developed Markets Off to Strong Start– In the month of January, developed markets recorded strong returns. Europe ex UK and the U.S. posted strong gains of 6.32% and 5.71%, respectively. Canada and the UK lagged other regions. The strong performance from 2017 has certainly carried over into 2018; however, care should be taken to avoid extrapolating these high returns.

 

Commentary

Emerging Markets Deliver Sizable Returns – The broader emerging markets were up 8.88% in January. Brazil and Russia recorded sizable gains of 16.84% and 12.57%, respectively. Over the past year, emerging markets outperformed international developed markets by approximately 11%. Future expected returns for emerging markets still look relatively bright.

 

Commentary

Consumer Discretionary Shines Consumer discretionary and information technology posted the strongest global sector returns of 7.93% and 7.37%, respectively. Utilities was the only sector to drop in January. Macro trends have helped certain sectors more than others. Consumer discretionary has gotten a lift from this mature business cycle and the accompanying wealth effect felt by many people. Rising rates also tend to help financial firms.

 

Commentary

Momentum Picks UpIn January, growth outperformed value while momentum recorded a strong return of 6.28%. Given the U.S. is in the later stages of the business cycle, growth’s outperformance isn’t entirely unexpected, but investors with longer time horizons should still expect a value premium as history suggests.

 

Commentary

Foreign Large-Cap Value Has Strong Month– In the international developed markets, large-cap value outperformed growth for the month. Small-cap growth outperformed small-cap value by 1.42%. Momentum posted a gain of 5.98%%. The outperformance of growth versus value is less drastic than the U.S. numbers.

 

Commentary

CPI Rises 2.12% in 2017– Both money market funds and T-Bills returned less than a percent over the past year. In 2017, the CPI increased by 2.12%. Investors may expect to see higher money market yields as the Fed continues to raise rates.

 

Commentary

Deflationary Hedges Mostly Lower – The returns of deflationary hedges were mostly negative in January. Investors were rewarded for taking on credit risk as leveraged loans and high yield returned 0.96% and 0.64%, respectively.  The global catastrophe bond index returned 1.33%. Traditional fixed income will face headwinds as central banks continue to tighten by raising rates or slowing their bond purchases.

 

Commentary

Energy Related Investments Record Monthly Gains– Inflation-sensitive investment returns were mostly positive in January. WTI Crude Oil and the Alerian MLP posted gains of 7.24% and 5.76%. U.S. real estate and inflation-indexed bonds were down for the month. Unexpected inflation is still a risk as the U.S. is in the later stages of the business cycle and the past quantitative easing by the major central banks has yet to produce many consequences.

 

Commentary

U.S. Dollar Depreciates Against Other Major Currencies– Over the past year, the U.S. Dollar depreciated against most other major currencies. The Euro and British Pound gained the most ground. The Mexican Peso and Israeli Shekel also had sizable appreciation against the U.S. Dollar.

 

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