• Economic data reports for the week were relatively good, led by ISM non-manufacturing, factory orders and the Fed’s Senior Loan Officer Survey showing positive results.
• Stocks experienced a more volatile week as events in the Ukraine raised anxiety again, which dissipated by the end of the week with net small positive effect in the U.S., although it weighed on foreign equities. Bonds performed well with safe haven rates falling, while some riskier foreign issues sold off a bit.

Markets were negatively affected early in the week, due to again increased tensions in the Ukraine, and comments from Poland’s Prime Minister about the situation, but equities recovered some losses by Friday as Russian military exercises ended—U.S. equities were actually in the black.  Small-cap stocks bucked the trend of late by posting stronger returns than large-caps; some of the valuation premium had been trimmed during the last several weeks of poor performance, but it’s still present.  From a sector perspective, consumer discretionary and materials outperformed while telecom lagged by dropping several percent on the week (although telecom is a tiny sector, with results impacted by Sprint’s extreme price drop after deciding to not pursue T-Mobile).

From its peak on July 24, the S&P has pared back by just under -3%, although it has certainly felt like more, with volatility (measuring by VIX) rising up from lows around 10 at that time to 16 last week.  Then again, as we’ve previously discussed, the VIX offers a fairly limited view on things, as a week of +/- 1% daily changes is certainly more volatile than one with a series of +/- 0.25% changes—although the net result could be exactly the same.

Outside the U.S., the Bank of England, ECB and Bank of Japan left policy rates unchanged and equities were all generally negative in the same range of 1-2%.  The ECB appears to be doing ‘intense preliminary work’ on an asset-buying program to keep deflationary impulses at bay.  Apparently, Italy has slipped back into recession, which GDP falling -0.2% for the second quarter following a -0.1% result for Q1.

Trade reports also showed that exports from China showed nearly a 15% year-over-year increase, which pushed Chinese stocks to the top of the list in terms of weekly performance, along with smaller related Asian nations.  Emerging market stocks have now overtaken developed foreign equities on the year (a benefit to portfolios, as we’ve had an overweight to EM for some time that has paid off recently).  Bucking the trend was Turkey, as the expected (and actual) re-election of PM Erdogan didn’t inspire investors.  Formerly one of the stars of the emerging market universe, Turkey has undergone a period of greater uncertainty as government influence in central bank policy raises concerns of a stall in business-friendly reforms.

Bonds performed well on the week overall with rates falling across the curve by several basis points.  High yield bounced back with a strong week, gaining a percent and leading all groups, while long Treasuries were just a step behind and most categories were in the positive by at least a few basis points.  Foreign bonds in developed ‘safer haven’ areas performed well, in line with U.S. issues, while peripheral Europe and emerging market names generally sold off.

Real estate sectors were led by mortgages, along with lower interest rates.  U.S. industrial/office and Asian REITs lost the most ground, down over a percent.

Commodities were led by natural gas, agriculture (wheat and soybeans, the latter likely due to Ukraine’s status as a large producer), and precious metals, all of which gained at least a percent on the week.  Livestock returns in both hogs and cattle corrected by a few percent continuing a paring back from a peak last month.  Commodity index returns have moved from sharply higher to generally flat from the start of the year, mostly due to weaker contributions from agricultural contracts, all of which have price declines in the double-digits as crop conditions improved from early forecasts.  Precious metals (palladium, but also good) have moved upward on the year and have added to index returns.

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.  FocusPoint Solutions, Inc. is a registered investment advisor.