Highlights from the Global Markets in 2Q23

U.S. stock indices posted positive returns in 2Q with performance dominated by large cap technology stocks. Global ex-U.S. equity markets trailed U.S. equity markets given lower technology exposure. Emerging market equity underperformed developed market equity, but results varied widely.

For U.S. fixed income, a “risk-on” environment bolstered returns for credit and securitized sectors, both of which outperformed U.S. Treasuries on a duration-adjusted basis. Globally, rates were mixed, rising in the United Kingdom and Australia, but they were flat to slightly lower across other developed markets. Currency shifts impacted returns across countries with mixed performance from the U.S. dollar.

U.S. Equity: The S&P 500 Index rose 8.7% while the tech-heavy Nasdaq Composite returned +13.1%. Within the S&P 500, Technology (+17.2%), Communication Services (+13.1%), and Consumer Discretionary (+14.6%) rose sharply while Energy (-0.9%) and Utilities (-2.5%) fell. Growth stocks trounced value for the quarter (Russell 1000 Growth: +12.8%; Russell 1000 Value: +4.1%) due largely to the sharp outperformance of Technology relative to Health Care, Energy, and Financials. Small cap stocks underperformed large (Russell 2000: +5.2%; Russell 1000: +8.6%) across the style spectrum.

Index concentration continued to have a significant impact on returns in 2Q. The aptly named “Magnificent Seven” (Nvidia, Meta Platforms, Amazon, Tesla, Apple, Microsoft, Alphabet) comprise roughly 25% of the S&P 500 and have accounted for the vast majority of S&P 500 gains in 2023 (up 64% versus 3% for the rest of the Index).

Global ex-U.S. / Global Equity: Lacking the U.S. market’s exuberance for any company associated with artificial intelligence, style impacts in developed ex-U.S. equity were more muted with value (MSCI World ex USA Value: +3.1%) in line with growth (MSCI World ex USA Growth: +3.0%). Illustratively, Industrials (EAFE Industrials: +6.4%) outperformed Technology (EAFE Technology: +5.9%). Japan (+6.4%) was a top performer and the Nikkei 225 Index hit its highest level since 1990. Japan benefited from strong inflows from foreign investors, expectations for corporate governance reform and an improved outlook for the Japanese economy. The yen sank 8% versus the U.S. dollar as monetary policy was kept ultra-loose, but the dollar fell versus the British pound (+2.8%) and the euro (+0.4%).

Emerging Europe (+11.2%) and Latin America (+14.0%) posted double-digit results while Emerging Asia (-0.8%) was hurt by poor performance from China (-9.7%) offsetting results from India (+12.2%). The recovery in China appears to be sputtering and economic news has been disappointing and remains uncertain. Poland (+24.5%) boosted the performance of emerging Europe while Turkey (-10.7%) weighed on the region’s results. In Latin America, Brazil (+20.7%) and Colombia (+11.7%) were top performers.

U.S. Fixed Income: The Bloomberg US Aggregate Bond Index fell 0.8% in 2Q as interest rates rose. The 10-year U.S. Treasury yield was 3.81% as of quarter-end, up from 3.48% as of 3/31. The yield curve was sharply inverted at quarter-end with the 2-year U.S. Treasury yielding 4.87%. High yield (Bloomberg High Yield Index: +1.8%) performed well amid robust risk appetite, muted issuance, and promising economic news.

Munis outperformed U.S. Treasuries. The Bloomberg Municipal Bond Index dropped 0.1% and the shorter duration 1-10 Year Blend was down 0.5%. As with taxable bonds, lower quality outperformed (Bloomberg Municipal Bond BBB: +0.7%; Bloomberg Municipal Bond AAA: -0.4%). The AAA municipal bond yield curve remained inverted (Muni AAA 1 year: 3.01%; Muni AAA 10-year: 2.54%.) but to a lesser extent than the U.S. Treasury yield curve (1 year: 5.40%; 10-year: 3.81%).

Global ex-U.S. Fixed Income: The Bloomberg Global Aggregate ex USD Index fell 2.2% (hedged: +0.7%). Japan (-8.0%) was the worst-performing constituent, due largely to yen deprecation.

Emerging market debt indices performed well (JPM EMBI Global Diversified: +2.2%; local currency JPM GBI-EM Global Diversified: +2.5%). Returns were mixed in the local currency index; Latin America (+11%) performed well with double-digit returns from Brazil (+12%) and Colombia (+23%) while Asia (-2%) was hurt by China (-4%) and Malaysia (-4%). Turkey (-29%) also posted a sharp decline.

Global Fixed Income: The Bloomberg Global Aggregate Index fell 1.5% (hedged: +0.1%). Japan (-8.0%) was the worst-performing constituent, due largely to yen deprecation. Rates were mixed, rising in the United States, United Kingdom, and Australia but flat to slightly lower across other developed markets. Currency shifts impacted returns across countries with mixed performance from the U.S. dollar.

Real Assets: The S&P GSCI fell 2.7% in 2Q. WTI Crude ended the quarter at $70.64/barrel, down from $75.67/barrel on 3/31. Copper (-8%) fell on concerns over ebbing global demand and a slowdown in China, and gold (S&P Gold Spot Price: -2.9%) was hurt by lowered expectations for inflation and reduced safe-haven demand. REITs were a bright spot (MSCI US REIT: +2.7%) while TIPS (Bloomberg TIPS: -1.4%) were hurt by rising interest rates.