Market Leadership Shifts Ahead of April Fed Meeting

Market Overview

Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 04/22/16. Rates and Economic Calendar Data from Bloomberg as of 04/25/16.

Happening Now                   

After outpacing domestic* and emerging markets* last week, international developed equities* posted their second consecutive week of gains and are now up 0.44% for 2016. The 1.3% gain in the MSCI EAFE Index, which is used to help measure the performance of international developed markets, was stronger than the 0.5% gain in U.S. Stocks and the -0.14% loss in emerging markets for the week, making this the second consecutive week of international developed market outperformance. While last week we wrote about the change in market leadership from Growth stocks to Value stocks thus far in 2016, the current outperformance of international developed markets is a shift we have been expecting and forecasted at the beginning of this year.

Central Bank policies around the world have played major roles in stock market performance over the course of the last 7 years and this trend is likely to continue in the future. Policy makers are faced with the daunting task of stimulating economic growth through a cocktail of low (and now in many cases negative) interest rates and asset purchases while balancing the risk of inflation. With the U.S. economy now on stable ground and the first interest rate hike behind us, focus is now on the pace and scale of future hikes. Given that inflation is persistently low and U.S. economic growth is running below long run expectations, we believe that the Fed is likely to maintain the current Target Fed Funds rate of 0.25% – 0.50% on Wednesday and very much keep a potential June rate hike on the table.

Changing interest rates are expected to affect the price performance of stocks, bonds, commodities, and currencies. The question investors must answer is how? Given the many moving parts and correlations of asset classes both in the U.S. and around the world, a portfolio that is not balanced in terms of its exposure to different risk factors could face periods of underperformance.

*U.S. Stocks are represented by the S&P 500 Index. Developed Markets are represented by the MSCI EAFE Index. Emerging Markets are represented by the MSCI EM Index.

**All indexes are measured on a total return basis.

Important Information and Disclaimers

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Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.

There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.

The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.

Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.


MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.

Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

Investors cannot directly purchase any index.

LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.