CAPTRUST Chief investment Officer
Investors embraced another quarter of asset class volatility with asset price returns oscillating through spring and early summer. Riskier asset classes attempted to carry the first quarter’s strong momentum into the second only to be disappointed by weak follow-through in early April. Europe dominated market concerns, specifically the potential Greek exit from the European Union and rising Italian and Spanish borrowing costs due to perceived banking sector weakness. Slowing macroeconomic data, including Chinese growth, U.S. employment and broad European consumer and business malaise also weighed on markets.
In early June, the U.S. Labor Department reported a weaker-than-expected employment picture, sending global equities lower while the 10-Year U.S. Treasury yield touched an all-time closing low of 1.47%. Measured by intra-quarter peak-to-trough performance, which for most riskier asset classes was from the first week of April through early June, global equities fell 12.4% (as measured by the MSCI World Index) and commodities fell 11.8% (as measured by the Dow Jones UBS Commodity Total Return Index). Concurrently, investor sentiment (as measured by the American Association of Individual Investors), declined to levels not seen since last summer’s market swoon.
As bad news seemed to be peaking, market participants shifted their attention to more potential accommodative fiscal and monetary policies. Deteriorating economic news seemed to temporarily dismiss policymakers’ rationale for not easing further, most notably inflation concerns. In late June, the U.S. Federal Reserve extended Operation Twist through the end of 2012, a program initially announced in 2011 designed to push down borrowing costs. China also announced easing measures in the quarter, but all eyes were firmly affixed on Europe where policymakers gathered in Brussels for, by some counts, the twentieth EU summit since Greece began to unravel in 2009. Leaders discussed centralized bank supervision, mechanisms for direct country aid, and even potential Eurozone debt issuance. While scanty on implementation details, markets reacted by sending global equities and commodities higher by 3.0% and 3.8% respectively in the quarter’s final trading session, trimming deeper losses earlier in the second quarter.
Once again, policymakers provided a “kick save” for global capital markets, but questions linger about how impactful future intervention may be given the cumulative actions to date. Global growth appears to be weakening and the U.S. Presidential election and “fiscal cliff” loom large in the back half of this year; more immediately, second quarter earnings season beginning in early July should provide more clarity on the slowdown’s depth. Investors will likely be forced to endure more macroeconomic, headline-driven volatility, with markets seeking evidence of durable growth versus perpetual central bank intervention serving to buy time.
For more expanded commentary, please download the full version below.