Asset Class Returns As At end-July 2010

Its getting interesting as we step into the second half of 2010, which I believe will be quite bullish for equities in general. July was a great month for the major asset classes—prices rose across the board. It was the best calendar month overall for the markets since last November, the last time that all the broad measures of stocks, bonds, REITs and commodities posted gains in a single month. Indeed, the Global Market Index (a passive measure of all the major asset classes) rose 5.7% in July, its best month since May 2009. Looks like I am not the only one starting to take on new positions.

REITs were the big winner, posting a 9.7% return in July. Equities weren’t far behind, particularly in foreign markets, in part because of the falling greenback. The 5.2% retreat in the U.S. Dollar Index (the biggest monthly decline in over a year) helped boost the dollar-based returns in stock markets in developed- and emerging-market nations overall. July’s rebound in stocks generally helped claw back a fair amount of the losses incurred after the previous two months of selling.

In just one month the foreign equity from developed markets have more than overtaken the up-down first 6 months and notched ahead on a year to date basis. Emerging markets equity in the month of July alone has doubled the entire gains for the first 6 months. These are very bullish signs.

The fact that REIT is still the top gainer after gaining more than 50% this year indicates that bottom fishing among the most distressed asset class has gathered momentum.

Meantime, there's the argument that relative valuations have moved in favor of stocks. The bulls say that equities are attractively valued next to bonds, which have posted a strong run so far this year. The Barclays U.S. Aggregate Bond Index is higher by 6.5% through July 31. U.S. equities, meanwhile, are more or less flat. And with the 10-year Treasury yield dipping below 3% last week while US corporate earnings have recently soared to record highs, some strategists think it's time to raise equity allocations and cut back on bonds.