Market Commentary: Running of the Bears Coming Next in the Global Economy?

While the “Running of the Bulls” was underway this week in Pamplona, Spain, investors ran from signs of a weakening global economy this week, generally fleeing riskier assets such as stocks, and piling into perceived risk-free assets such as U.S. Treasury bonds.

By Regina Shafer, Assistant Vice President, Fixed Income Investments

The S&P 500 closed the week up 0.17% at 1,357. U.S. Treasury bonds rallied, with the 10-year ending the week down 0.06% in yield at 1.49%. Gold rose 0.40% on the week to close at $1,590 an ounce.

Small-business owners have grown more pessimistic, as evidenced by a drop in the National Federation of Independent Business’ optimism index to 91.4 in June from 94.4 in May. In addition, small-business owners indicated reduced hiring plans, a headwind for the struggling labor market. In a week that was light on U.S. economic data, this week’s releases were mixed, supporting the case for subpar growth. May consumer credit increased by a greater-than-expected $17 billion, led by credit card borrowing. While the increase in borrowing helps retail sales, it could be a sign some consumers are struggling to make ends meet.

After spiking above 7.0% earlier this week, Spanish 10-year government bond yields retracted to end the week at 6.54%. Investors appear to have gained some comfort with the European Union’s announced plans to inject 30 billion euros into distressed Spanish banks by the end of July, with more to come later. We note that the plan remains short on details. It appears to be a step in the right direction, but Europe’s troubles appear to be far from over.

U.S. corporate earnings season kicked off this week. Corporate earnings have been a positive contributor to the economy, as well as the stock market, during this recovery. However, this engine appears to be sputtering, as evidenced by downward earnings expectations during the past several weeks. Earnings are expected to be down slightly, on a year-over-year basis, for the second quarter, for the S&P 500 index. Given the headwinds of a slowing global economy, combined with negative currency translation associated with a strengthening dollar, we are doubtful about any meaningful earnings growth for the next few quarters.

From a global perspective, our managed diversified portfolios favor corporate investment-grade and high-yield bonds, commercial mortgage-backed securities and municipal bonds for high-yield investors. We are slightly underweight on stocks, with a bias toward large-capitalization U.S. companies. We are also overweight on gold mining stocks (which represent a relatively small position), given our positive long-term outlook for the metal, combined with relatively attractive valuations for the sector.

This content is provided courtesy of USAA.

This material is for informational purposes and is not investment advice.

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