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CLS: August Market Review

09/03/2014

The S&P 500 was up 4% in August, and is now 8.4% higher than it was at the end of last year. Smaller companies’ performance (which the S&P 500 does not capture) gained 5%, but still lags larger companies in the year-to-date total return race, as they are only up 1.8%.

International stocks ended the month slightly higher, with the international equity benchmark ACWI ex-U.S. modestly positive at 0.6%, though it is still up on the year by 5.1%.  Breaking out the international markets in more detail, the MSCI EAFE Index, which only captures developed economy markets like Europe and Japan, lost 0.2% in August, but is still up 2.6% for 2014. While the MSCI Emerging Market Index, which includes countries like China, India, Brazil and Russia, was up 2.2% in August and 10.1% for 2014.

Meanwhile, bond yields continue to drop with the 10-Treasury now at 2.3%.  The overall investment grade bond market, as defined by the Barclay’s Aggregate Bond Index, gained 1.1% in August and has now gained 4.8% for 2014.  Not bad for an asset class widely expected to get decimated this year.

Low Volatility Does Not Mean Things Aren’t Changing
Though the summer seemed to fly by even faster than prior summers, something that didn’t move that fast or furious this summer was the markets. They just kept grinding steadily higher. And though we had a mini-spike of volatility in late July, overall market price volatility remained near multi-year lows.  Despite this relative calmness, not only for the summer, but for the entire year, there has still been some very interesting market movement.

First, when looking at the U.S. stock market, larger companies have clearly left smaller companies in the dust.  This is atypical for a normal bull market, as smaller companies tend to be more levered to the market cycle – meaning, they typically gain more in up markets and lose more in down markets. This larger company performance has helped CLS portfolios this year, as we have emphasized larger companies due to their better relative valuations and expected growth rates. We continue to hold this view and positioning.

Second, within international equities, emerging market stocks have decisively outperformed developed international markets such as Europe and Japan.  This has been more of a mixed bag for portfolios this year, as we like both developed and emerging markets and have been steadily and gradually increasing exposure to both all year.

Regarding emerging markets, even though flows out of this asset class were particularly strong early this year, CLS portfolio managers in the aggregate were buying. So far, we’ve been rewarded for not abandoning emerging markets.

What hasn’t yet helped, however, is that we have also been buying Europe.  Again, valuations for many European markets are extremely attractive, and they have become even more so on negative headlines this year, such as geopolitical concerns out of the Ukraine and weaker economic data in some countries. Nonetheless, their stocks are on sale, and the discounts are only getting more attractive.

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