Bond yields in the major developed economies continue to reach extraordinarily low levels. More positive recent economic data in the U.S. has had only a small impact on U.S. Treasury investors. The yield on the 10-year U.S. Treasury note rose to 1.62 percent in late August from 1.38 percent in July, but 1.62 percent is extremely low by historical standards. As recently as January 2014, the yield on the 10-year Treasury note was 3 percent. The move down in yields since then has contributed to a positive 12.4 percent return for the Barclays Aggregate Bond Index, a broad measure of the bond market (Chart 5). (When bond yields decline, returns rise).
Yields and returns have been even more dramatic in the U.K. The benchmark 10-year gilt (government bond) yield was close to 3 percent in January 2014 and has tended to track the U.S. benchmark lower, though the yield on the gilt drifted down at a slightly faster pace. The gap widened sharply after the U.K.’s Brexit vote on June 23. The faster decline in gilt yields helped push the total return on the Barclays Sterling Aggregate Bond index, a measure of the U.K. bond market, to 18.9 percent since 2014.
Similar performance is seen in the euro bond market, where yields on the benchmark 10-year euro bond fell from 2 percent at the beginning of 2014 to a negative 0.08 percent in late August. That decline in yields led the Barclays Euro Aggregate Bond index to a 34 percent rise since January 2014, far outpacing the U.S.
Economic conditions across many of the world’s major developed markets remain quite fragile, and some central banks continue to pursue extraordinary policies to spur growth. Despite central bank efforts, in Europe growth has been minimal. In the U.K. there has been some improvement on the economic front, but the surprise result of the Brexit vote calling for the U.K. to leave the European Union has resulted in a surge of uncertainty, pushing yields lower. In the U.S. the Federal Reserve increased short-term rates once and is expected to raise them again by the end of the year. Although U.S. economic growth has been erratic, overall progress has been made. Among these major bond markets, the outlook for future returns on fixed-income securities looks challenging.
The U.S. dollar has been a significant force in driving commodity prices down over the past couple of years. Because most commodities are priced in U.S. dollars, the stronger dollar makes commodities more expensive for non-dollar buyers. That, combined with slow global economic growth, which reduces real demand, has meant price drops for many commodities, particularly since mid-2014. That is evident in the S&P Goldman Sachs Commodity Index, which fell about 60 percent from mid-2014 through early 2016 (Chart 6).
Within the index, two construction-related commodities, lumber and copper, both posted significantly smaller declines over the same time period. Copper prices fell about 44 percent, while lumber prices dropped around 40 percent.
Since hitting their respective lows, in late 2015 for lumber and early 2016 for copper and the S&P Goldman Sachs Commodity Index, lumber prices have risen about 46 percent and are currently hovering about 12 percent below their level at the beginning of 2014. Copper prices have risen about 6 percent and are about 39 percent below their Jan. 1, 2014 level, while the S&P Goldman Sachs Commodity Index has rebounded by more the 30 percent from the low but remains about 42 percent below its level at the beginning of the year.
Real demand for lumber, coming from the modest recovery in new site construction and strong gains in home improvement spending, is likely supporting the relative outperformance of lumber prices compared with copper and commodities in general. However, it’s unlikely that big gains for any commodities are going to occur without some combination of stronger real demand and a weaker U.S. dollar.
The one exception may be gold. Gold is a safe-haven investment in times of increased risk and uncertainty. Since the beginning of 2014, gold suffered declines of only about 12 percent through late 2015. Since that recent low, gold prices have risen about 24 percent. Among the commodities shown in Chart 6, only gold is currently above its price level from Jan. 1, 2014.
The Standard & Poor’s Composite Index of 500 Stocks hit a new record high of 2,193.8 on Aug. 15. That puts the total return for the S&P 500 at 276 percent since the market low on March 9, 2009. Over that period, consumer discretionary stocks have been the best performing sector, posting a total return of 477 percent.
Similarly, the broader S&P Composite 1500 hit a low on March 9, 2009, and has generated a total return of 283 percent. Consumer discretionary stocks have led the gains for this index as well, generating a total return of 466 percent.
Since the beginning of 2010, consumer discretionary stocks in the S&P 1500 have returned 198 percent, still the best among the 10 stock sectors. Among consumer discretionary stocks, industries related to home improvement rank near the top. Home improvement retailer stocks have posted a return of 372 percent since the beginning of 2010, far outperforming the broader S&P 1500 (Chart 7). Manufacturers of housewares and specialties, home furnishings, and home appliances all gained significantly more than the broader index. These groups likely all benefited from increased spending on home improvements.
Homebuilders posted a total return of 132 percent, very close to the 126 percent gain of the broader market. Among the laggers, forest products makers, part of the materials sector, gained 107 percent, while consumer electronics manufacturers and home furnishings retailers trailed the broader market with returns of 100 percent and 51 percent.
Low interest rates, a strong labor market, and continued income growth are likely to support continued increases in home improvement spending. That, in turn, should provide a solid foundation for future gains in sales and earnings for industries related to home improvement.
As the U.S. equity market slowly heads to new highs, the S&P Global Broad Market Index excluding the U.S. still trails its previous high set on April 27, 2015. As of Aug. 29, the index was about 8 percent below its previous record.
However, comparing the two markets with each other rather than with their own previous highs shows a starker contrast. The U.S. equity market has far outperformed the global index that excludes it. Since Jan. 1, 2010, the S&P 500 has gained 134 percent, while the global index has returned only about 55 percent.
Comparing the indexes at the stock-sector level reveals that despite the dramatic difference in overall performance of the two markets, the relative performance of corresponding sectors within each index is much the same (Chart 8). In both markets, consumer discretionary, health care, and consumer staples stocks were the three top-performing sectors. Info tech, telecommunication services, and industrials were the next best performers in each index. Financials, utilities, materials, and energy were the bottom four in both measures.
A second observation is that comparing corresponding sectors for each index generally showed narrower performance gaps for the better performers and wider gaps for the worst. An example is consumer staples, the top performer in the global index. The U.S. consumer staples sector outperformed its global counterpart by 26 percentage points. U.S. utilities beat global utilities by 91 percentage points. On average, the top five sectors in the global index trailed their U.S. counterparts by 55 percentage points, while the bottom five trailed the U.S. sectors by 64 percentage points.
The conclusion is that sector performance needs to be understood within the global market.