Global equities were modestly up in June with the MSCI ACWI Index returning 0.5%. At home, small-cap stocks bested large-cap equities with the S&P 500 Index gaining 0.6% and the Russell 2000 Index returning 3.5%. In Europe, stocks sold off as the European Central Bank hinted it may slow down its quantitative easing program as reflationary pressures build. The MSCI Europe Index fell 1.1% in June but losses were partially offset as the euro gained 1.6% against the US dollar. The MSCI EAFE was nearly flat as Japanese equities rallied to balance losses in Europe. Emerging market equities rose 1% with the MSCI EM Index ending June up 18.4% this year.

In fixed-income, the 10-year Treasury yield rose to 2.31% and the 10-year German bund yield jumped 16 basis points to 0.47%, eroding returns in the US and Europe. The Barclays US Aggregate Bond Index fell 0.2% and the Barclays Global Aggregate Index declined 0.1% on the month. In the US, rising real rates fueled a decline in inflation-protected securities with the Barclays US TIPS Index falling 0.9%. Emerging market bonds were little changed in June, with the JPM Morgan GBI-EM Global Diversified Index eking out a return of 0.5%.

Many investors have likely realized strong gains due to a sustained rally in global equities through the first half of the year. We maintain our overweight recommendation for non-US developed market equities and emerging market stocks. Given the continued spread compression in US high-yield debt, we recommend investors employ dynamic credit strategies and suggest allocating to TIPS in place of core bonds.