Developed Markets Rise
In the month of January, international developed stock markets returned 0.43%. Japan and the U.S. recorded returns of 4.62% and 1.53%, respectively. The U.K. and Pacific ex Japan lagged other markets for the month. International developed markets are up 9.48% over the past year. The U.S. economy continued to be resilient in January with a rebound in travel, tourism, and other consumer discretionary spending. Increasing manufacturing investments is also helping boost the economy.
Emerging Markets Drop in January
Broader emerging markets posted a -3.55% return for the month. India and Mexico recorded returns of 2.41% and -1.86%, respectively. Other than the Indian market, most Asian markets posted negative returns, with China, Hong Kong and Korea lagged other markets for the month. Emerging markets are down -2.06% over the past year. India’s economy continues to experience robust activity. China’s economy continues to be weighed down by weaker corporate capital expenditures and a shaky real estate sector. Near historic low valuations relative to the U.S. and international markets may help emerging market investors going forward.
Information Technology and Telecommunications Outperform
Global information technology and telecommunications sectors recorded returns of 3.53% and 3.43%, respectively, in January. Materials and utilities lagged other sectors this month. Although the energy and materials sectors underperformed over the past year, as opposed to 2022, their medium-term fundamentals look attractive. Recessionary concerns are a short-term headwind.
DOMESTIC EQUITY FACTORS
Value Stocks Underperform
In January, value underperformed growth in the large-cap space and the small-cap space. Momentum recorded a return of 3.49%. Value stocks across the world continue to trade at large discounts relative to growth stocks. Forward earnings assumptions may be too optimistic for growth companies, particularly those in the information technology sector.
FOREIGN EQUITY FACTORS
Value Mixed in International Markets
In the international developed markets, value underperformed growth in the large-cap space but outperformed in the small-cap space for the month. Momentum recorded a return of 3.91% while small-cap emerging market stocks posted a return of -3.22%. Value stock valuations are still very low relative to growth stocks in both international developed and emerging markets, which is consistent with the US market.
Savers Benefitting from Higher Interest Rates
In January, the three-month Treasury bill index returned 0.43%. From the beginning of 2022 through the end of January 2024, the annualized interest rate on the 90-day Treasury bill increased from 0.08% to 5.42%. Savers and retirees are now getting paid much more interest. Real interest rates are positive with the CPI increasing by 3.30% over the past year through the end of December.
DISINFLATION DEFLATIONARY HEDGES
Long-Duration Fixed Income Investments Underperform
The returns of deflationary hedges were mostly negative for the month. The Bloomberg Barclays U.S. Agg Bond Index returned -0.27% for the month. Long-term government bonds and long-term municipal bonds recorded returns of -2.19% and -0.89%, respectively, as interest rates increased. Catastrophe bonds continued their strong performance, returning 1.83% in January. Insurance-linked securities like catastrophe bonds are benefiting from higher premiums that insurance companies are demanding from buyers.
INFLATION SENSITIVE INVESTMENTS
WTI Crude Oil Rebounds
Inflation-sensitive investment returns were mixed for the month. WTI crude oil and MLPs were up 6.09% and 4.10%, respectively, in January. International real estate and U.S. natural gas were down for the month. The Bloomberg Commodity index posted a return of 0.40%. Gold bullion was down in January as interest rates and the US dollar rose. As geopolitical risks increase and become more interconnected, gold bullion may serve as a safe haven. Emerging market central banks have been steady buyers of gold bullion in recent years.
U.S. Dollar Weakens Versus Other Currencies
Over the past three months, the U.S. dollar depreciated against most other major currencies. Over the past year, the U.S. dollar strengthened against the Japanese Yen, Indian Rupee, and Chinese Yuan. The continuation of U.S. fiscal and trade deficits may weigh on the U.S. dollar in the medium-term to long-term. Gross federal debt to GDP stands at 120% and is forecasted to increase throughout the decade. In addition, the fiscal deficit is 6.19% of GDP at a time of economic expansion and low unemployment.
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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