Strong demand for defensive and high-yielding stocks

US Equity Market

Global markets experienced their worst-ever two-day loss in the wake of the UK’s decision to quit the European Union (EU), losing a record US$3.01 trillion, according to S&P Dow Jones Indices. Nevertheless, the leading mainstream US equity indices managed to rebound from sharp initial losses to end the month in marginally positive territory. The Dow Jones Industrial Average Index crept 0.8% higher over June as a whole, while the S&P 500 Index edged up by 0.1% overall. In contrast, the technology-heavy Nasdaq Index fell by 2.1% over the month.

Six of the S&P 500 Index’s ten industry sectors rose during June, and high-yielding shares remained in favour. The best-performing sectors were telecommunication services and utilities, followed by consumer staples, energy, health care, and industrials. At the other end of the performance spectrum, the worst-performing sector in the S&P 500 Index was financials: despite a positive result from recent “stress tests” performed on the sector, demand for stocks in the financials sector was dampened by dwindling expectations of monetary tightening and deteriorating prospects for global economic growth. Information technology, consumer discretionary, and materials also performed relatively poorly over the month.

At a summit of North American leaders, President Barack Obama warned that the UK’s vote in favour of Brexit had raised “genuine longer-term concerns about global growth… at a time when global growth rates (are) weak already, this doesn’t help”. Meanwhile, Federal Reserve policymakers pledged to provide dollar liquidity in order to “address pressures in global funding markets, which could have adverse implications for the US economy”.

Fed Chair Janet Yellen warned during June that investors’ perception of risk, and their appetite for risk, could change abruptly. Although the Fed believes that that “positive economic forces have outweighed the negative”, policymakers chose to hold interest rates steady at their June meeting. Looking further ahead, Ms Yellen said, “If incoming data are consistent with labour market conditions strengthening and inflation making progress… gradual increases in the federal funds rate are likely to be appropriate”.

Nevertheless, disappointing employment data raised concerns about the sustainability of US economic growth. 38,000 new jobs were added during May, compared with 123,000 in April and 186,000 in March. Despite this, the rate of unemployment dropped from 5% to 4.7%. The Fed expects an unemployment rate of 4.7% at the end of 2016, easing to 4.6% in 2017.