Video: July 2010 Macro Summary

SEI Global Fixed Income Management manages fixed-income strategies for SEI’s Managed Account Program (MAP) and Integrated Managed Account Program (IMAP).

Hello, my name is Sean Simko. I am Managing Director of SEI Global Fixed Income Management. Today’s discussion is a recap of the market activity and performance for the month of July.

As an investor, you can look at data like you would at a glass—positively or negatively, either half full or half empty. Seldom does the market provide the opportunity for investors to carry both views and be right. Looking back over the month, there were three global events that fit in this category. Earnings were positive overall, but questions remained about the sustainability of top-line growth. European bank stress tests were released, and only seven banks had failing grades. However, were the tests sufficiently stringent or did they just state the obvious?
The U.S. economy continues to grow, albeit at a reduced pace, which is expected, but it’s uncertain how long the consumer will be able to sustain the current level of consumption with the unemployment rate at 9.6%. For every event, there was a downside risk, adding to the defensive tone.

Economic data was softer than expected in July, pointing to a slower economic expansion. The initial gross domestic product figure showed growth of 2.4%, which was lower than expected. This may be an early sign that companies will be less likely to add jobs, which isn’t encouraging to those looking for work. Slow growth and low inflation will likely keep the Fed on hold and the federal funds rate at its current low level, which will continue to support riskier assets as investors search for yield. We remain positive on investment-grade credit and feel that this trend will continue unless companies start to feel pressure on earnings as consumers tighten their discretionary spending, which we believe is more likely to occur in the fourth quarter.

Even with the differing viewpoints, the Barclays Capital U.S. Aggregate Index [1] posted solid gains, as investors put risk back on the table for the month. The flight-to-quality trade was en vogue as well, with Treasuries posting positive returns and the belly of the curve outperforming.

While the Federal Open Market Committee (FOMC) did not meet in July, Fed speakers held true to their recent themes, commenting on the labor market and softer economic growth. In its recent Beige Book report, the Committee downgraded its view on economic growth and maintained a cautious outlook. Chairman Bernanke mentioned that extending the Bush tax cuts would help stimulate the economy by directly benefiting the consumer, even as other figureheads such as Treasury Secretary Timothy Geithner have said the cuts should not be extended. We have started to see consumer sentiment and consumption figures dip lower, and we believe that extending the tax cuts would help bolster consumer confidence and consumption, which the economy needs to remain in expansion.

Mixed data has resulted in a challenging environment across most sectors. Looming concerns about sputtering economic growth and the potential for deflation should keep Treasuries in demand until there is further clarity from the Fed on prospects for economic growth. We remain cautiously optimistic on the economy at this point in time, ruling out the prospects of a double-dip recession. Our view is that economic growth will continue but at a significantly slower pace than previously anticipated.

If you have any questions regarding this commentary, or questions surrounding the market, please contact your SEI representative.

Thank you.

[1] The Barclays Capital U.S. Aggregate Bond Index is a benchmark index composed of U.S. securities in Treasury, Government-Related, Corporate, and Securitized sectors. It includes securities that are of investment-grade quality or better, have at least one year to maturity, and have an outstanding par value of at least $250 million.