One doesn’t need to remind the capital markets that risk is in the air. A cursory glance at the horse race for the past month among the major asset classes tells the story, which is predominantly one of espousing caution.
On the extreme ends of performance for the past month, through July 3, as the graph below illustrates, REITs continue to lead the way, racking up an impressive 3.6% rise, as per the Vanguard REIT Index Fund. On the losing end of the spectrum: commodities, which lost 3.8% over the past month, based on results from the PIMCO Commodity Real Return Strategy A Fund.
Asset class proxies: Vanguard REIT, iShares Russell 2000, iShares MSCI Emerging Markets, MSCI EAFE, S&P 500 SPDR, Vanguard High-Yield Corporate, PIMCO EM Bond, Morningstar Short Gov’t Category, PIMCO Foreign Bond, iShares Lehman Aggregate Bond, Vanguard Inflation Protected Securities, PIMCO Commodity Real Return.
After you chop off those two extremes, the range of performance among the remaining ten asset classes is quite narrow, suggesting a heightened sensitivity for embracing prudence. A mere 131 basis points separates the second-best performer (cash, as per the Morningstar Ultra Short-Term Bond Fund category) from the second-worst (TIPS).
Investors can be forgiven for expecting the proverbial second shoe to drop. With North Korean missiles flying over the Sea of Japan, threats of higher inflation lurking in the shadows, fears of slowing growth, and any number of other crises gurgling with potential, ours is a moment to reconsider the safety that comes by watching and waiting.

In terms of economics, the great question is what the Fed will do in the weeks and months ahead. No shortage of fresh numbers await release in July, all with the potential to influence the central bank’s next move, if any. Among the highlights: June’s payroll update on Friday, June’s retail sales on July 14, and consumer prices for June on July 19. Another number that’s sure to receive broad scrutiny is the first estimate of the second-quarter’s GDP, which is dispensed to the world on July 28.
Meanwhile, today there’s fresh reason to see employment momentum as half full rather than half empty, thereby making a case for another interest-rate hike at the next scheduled Fed meeting on August 8. The National Employment Report, published by Automatic Data Processing (ADP), posted a 368,000 rise in private-sector jobs last month. That’s a sharp increase from 122,000 in May, suggesting that employment momentum remains firmly on the upswing. “That is the largest one-month increase in the relatively brief five-year history of this indicator,” writes David Resler, chief economist at Nomura Securities in New York, in a note to clients this morning.
The bond market’s initial reaction was predictable: sell. The yield on the benchmark 10-year Treasury moved up to around 5.20% in early trading. That’s up around five basis points from Monday’s close, and within shouting distance of ~5.25% set in late-June, the highest since 2002.
Risk is alive and well as the summer begins in earnest. Figuring out how to price it is, once again, the question for a new day and new world order.