Markets Now: Review and Outlook

Markets Now: Review and Outlook

Global equity markets rallied in June and most major equity regions fully recovered from May’s selloff.

Market results1

Global equity markets rallied in June and most major equity regions fully recovered from May’s selloff. U.S. large cap posted the highest June return (+7.0%) in over sixty years.2 U.S. small cap rose 7.1%, nearly recovering from May’s drop of -7.8%. U.S. equity volatility, as measured by the VIX index, sharply declined -19% and ended the month at 15.1. Abroad, both developed and emerging markets also performed strongly, rising by +4.3% and +4.7%, respectively. Chinese equities continued to benefit from government led stimulus and rose the most out of the major equity regions, +7.7%.

The U.S. dollar was down -1.6% in June and was the worst performer out of the G10 currencies. The currency was weighed down by increased expectations of a Fed rate cut and weak economic data. After the Fed meeting, chairman Jerome Powell’s comments were perceived as dovish and the “dots” projections showed that seven policymakers are forecasting fifty basis points (bps) of cuts by year end. The projected rate cuts, along with weak U.S. ISM manufacturing data and U.S. non-farm payrolls data led to the U.S. ten-year yield dropping twelve bps. This came after the month of May where the ten-year yield fell thirty-eight bps.

The U.S. was not the only major central bank to announce dovish comments. The European Central Bank announced that they will likely keep interest rates unchanged until mid-2020 and did not rule out future interest rate cuts. European economic data was mixed for the month, as French industrial production, German PMIs and French PMIs all beat expectations. However, German manufacturing contracted for the sixth month in a row.3

Crude oil rose 9.3% as tensions around the U.S. and Iran escalated, as Iran shot down a U.S. drone in the Strait of Hormuz, where 20% of global crude passes daily. Oil was also supported by a fall in global inventories.

Gold was the beneficiary on multiple fronts and rose 8.3%, reaching a multi-year high. Support came from a weaker U.S. dollar, dovish comments by the Federal Reserve and heightened geopolitical tensions.

Market Outlook for July

Our economic outlook has moved from negative to positive territory. This view is being supported by improved global trade and rising average hours works.  

QS Leading Economic Indicator

QS Leading Economic Indicator

Our outlook for U.S. stocks outperforming investment grade bonds remains in positive territory. Valuation, as measured by comparing U.S. equities earnings yield to the ten-year treasury yield, continues to be the largest driver of this preference, as the factor’s strength ranks in the top quartile on a historical basis. The twelve-bps drop in the ten-year treasury yield in June supported the valuation factor.

In U.S. fixed income, we forecast that high yield bonds will outperform investment grade bonds over the next month, a large reversal compared to last month’s forecast. This change has been driven by spread narrowing between high yield and investment grade bonds and the drop in equity volatility.

We strongly believe that U.S. stocks are positioned to outperform their international developed market counterparts; this position is now within the top decile on a historical basis. The model’s preference is driven by options market data (which shows greater demand for price protection in international-developed markets than in the U.S.), stronger price momentum in the U.S. and yield curve dynamics. Yield curves in other developed markets are flattening at a faster rate than in the U.S. which we interpret as a sign of lower economic prospects.

European stocks are forecasted to outperform European bonds in our model. Five of the six explanatory variables in our model point to this conclusion, including European stock price momentum, valuation, spreads on short-term banking lending rates, and European government yields.

Asset Class Preferences

Asset Class Preferences are based on QS Investors proprietary quantitative factor models. These rules-based financial models use a combination of indicators that analyze asset valuations, investor sentiment, and the broad economy.


A basis point (bps) is one one-hundredth of one percentage point (1/100% or 0.01%).

The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Reserve’s dot plot shows the projections of the 12 members of the Federal Open Market Committee (FOMC) on where they think fed funds rate should be at the end of the various calendar years shown, as well as in the long run—the peak for the fed funds rate after the Fed has finished tightening or “normalizing” policy from its current levels. The dot plot is published after each Fed meeting.

The Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI) for the US manufacturing sector measures sentiment based on survey data collected from a representative panel of manufacturing and services firms. PMI levels greater than 50 indicate expansion; below 50, contraction.

The Group of Ten (G-10 or G10) refers to the group of countries that agreed to participate in the General Arrangements to Borrow (GAB), an agreement to provide the International Monetary Fund (IMF) with additional funds to increase its lending ability

Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.

The yield curve shows the relationship between yields and maturity dates for a similar class of bonds.

1 All data Sources: Bloomberg and Reuters, as of June 30, 2019, unless otherwise indicated.Global Equities represented by the MSCI ACWI Gross Total Return Local Index; U.S.Large-Cap stocks represented by the S&P 500 Total Return Index; China Equities represented by MSCI China Net Total Return Local Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index.

2 Source: MarketWatch

3 Source: Reuters.

QS Leading Economic Indicator Index is a proprietary composite of economic data that QS Investors believes are significant in determining financial and economic conditions in the U.S. Past performance or any prediction or forecast is not indicative of future results. QS Leading Economic Indicator Index inception date is 1/2/1970.

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Yields and dividends represent past performance and there is no guarantee they will continue to be paid.

Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

Outperformance does not imply positive results.

High yield bonds are subject to increased risk of default and greater volatility due to the lower credit quality of the issues.

U.S. Treasuries are direct debt obligations issued and backed by the "full faith and credit" of the U.S. government. The U.S. government guarantees the principal and interest payments on U.S. Treasuries when the securities are held to maturity. Unlike U.S. Treasury securities, debt securities issued by the federal agencies and instrumentalities and related investments may or may not be backed by the full faith and credit of the U.S. government. Even when the U.S. government guarantees principal and interest payments on securities, this guarantee does not apply to losses resulting from declines in the market value of these securities.