July was another volatile month in equity and credit markets.  Weakness dominated much of the time period; however a late surge pushed returns into positive territory across most asset classes.


The third quarter began in mixed fashion for the domestic economy with positive news from the labor markets offset by weakening retail sales.  The U.S. economy remains in stall speed but is showing modest signs of leveling out.

  • Labor markets for July were a positive surprise.  Nonfarm payrolls expanded by 163,000, above economists’ expectations for job growth of 100,000.
  • Weak earnings growth is beginning to spill over into other areas of the economy, most notably retail sales.
    • In June, retail sales dropped 0.5%, influenced by weakness in gasoline prices and autos.
    • It was the third consecutive month of declines in retail sales and indicates a reversal of fortunes for recovery efforts.  Consumers were previously a source of strength for the recovery but that has come to an end.
  • Second quarter GDP registered a 1.5% increase, slightly above consensus expectations.
    • Annualized growth in the last twelve quarters now stands at 2.2%, which historically remains one of the weakest recovery environments.


Equity markets climbed higher in July, albeit in choppy fashion.  A late rally saved the month and pushed markets into positive territory.

  • Markets rallied from a near -2.0% month-to-month loss on July 24th to a near +2.0% gain in the final five days of the month, as language from Fed Chairman Ben Bernanke and ECB President Mario Draghi enhanced optimism that their respective banks would take additional action.
  • U.S. stocks posted a modest uptick in July, with the S&P rising 1.3%.
    • Defensive equities outperformed from both a market cap and sector standpoint.
      • Large cap stocks outperformed small caps.
        • The Russell 1000 posted a monthly return 2.6% higher than the Russell 2000 Index.
        • Telecom and Utilities finished with the first and third highest returns in the Russell 3000 Index.
        • Energy stocks rose 3.6% in July, as both crude oil and natural gas prices improved.
  • Corporate earnings have been better than expected but revenues have come in well below the levels seen thus far in the recovery.
    • Three-hundred and eighty-nine companies in the S&P 500 have reported earnings.
      • Seventy-percent reported results in excess of the average estimate.  This is just slightly below the 72% beat rate witnessed during the prior four quarters.
      • Revenues, on the other hand, beat just 43% of estimates.  That pales in comparison to the 63% rate of the past four quarters and would be the lowest beat rate since Q1 2009.
    • The average growth rate is just 0.7%, compared to an expected 3.4% at the beginning of the quarter.
  • Foreign stocks were mixed in July, as the most troubled regions came under selling pressure while those countries seemingly farthest from the European crisis posted gains.

Fixed Income

Core bonds, as represented by the BC Aggregate Index, had a good July with a return of +1.4%.  Price appreciation driven by falling Treasury yields was the predominate source of return.  The yield for the BC Aggregate Index fell to an all-time low of 1.7%.

  • U.S. Treasuries hit all-time lows as the deterioration in Spain appeared to reach a tipping point.  The 10-year yield dipped below 1.4% late in July before ending the month at 1.5%.
  • Investment grade corporate bonds had a very strong July with gains of 2.9%.
  • Convertible bonds returned a modest +0.6% during July.  Hampered by their equity sensitivity, convertibles were among the worst performing fixed income sector for the month.
  • Municipals outperformed Treasuries during the month; the BC Muni Index gained 1.6% vs. 1.0% for the BC Treasury Index.
    • Even at low absolute yields, munis have been strong due to investor need to put cash to work into a shrinking market.
    • The month saw muni headlines emanating from the state of California as three municipalities declared their intentions to enter Chapter 9 proceedings.
      • The headlines appeared to have little impact on valuations.  California muni spreads continued to tighten in the midst of the news.
    • The overall number of municipal defaults in 2012 year-to-date has been lower than in 2011.


Following a lackluster second quarter, most alternative managers were able to provide alpha in July, participating in the month’s equity and fixed income rallies.  The HFRX Global Hedge Fund Index rose 0.5% and the large majority of hedge fund indices finished the month in positive territory.  It was also another strong month for MLPs.

  • Hedged equity managers captured slightly less than 50% of the equity rally in July, while volatility held relatively steady during the month and equity correlations declined.  Both trends are important for managers who seek to differentiate between longs and shorts.  The “risk-on/risk-off” environment is difficult for hedged strategies as many stocks do not trade on fundamentals.
  • Global Macro managers posted a 1.5% gain on the month but remained negative on the year.
    • It has been, and continues to be, a difficult trading environment for macro managers due to the unusual number of policy interventions from central banks around the globe.
    • July was the best month of performance for macro managers since late 2009, as many managers were positioned long credit, long government bonds, and long the U.S. Dollar relative to the Yen and Euro.


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