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Market Commentary

1st Quarter 2019 Market Commentary – Pull the Chute!

Benjamin Lavine, CFA, CAIA

March 2019 Highlights:

• Global stocks returned 1.3% led by the U.S. and Asia-Pacific ex Japan, up 1.9% and 1.5%, respectively; Emerging Markets, Europe and Japan lagged returning 0.8%, 0.6%, and 0.6%, respectively. 
• S&P 500 rose 1.9%, led by growth (technology, consumer discretionary) and defensive (real estate utilities) sectors; while industrials cyclicals and financials lagged. 
• S&P Small Cap Index was down 3.3% in stark contrast to U.S. large cap performance, while S&P Pure Growth outperformed Pure Value (2.2% vs -1.6%, respectively). 
• U.S. thematic, risk-based factors: Quality, Minimum Volatility, and Momentum outperformed the broader market; Value and High Dividend Yield underperformed. 
• Fixed income: U.S. fixed income benefited from a sharp drop in interest rates following the March Fed meeting. The Bloomberg/Barclays Aggregate Bond Index performed in line with U.S. stocks, returning 1.9% while U.S. High Yield returned 0.9% despite some credit spread widening. 
• 10-Year U.S. Treasury Yield dropped to 2.41% at month-end from 2.76% at the beginning of March, having dropped to as low as 2.37%, its lowest levels since mid-December 2017. 
• U.S. REITs were a large beneficiary of the drop in interest rates. Commodities performed well with continued advances in oil prices; while precious metals lagged despite dovish central bank policy shifts. 
• As of the time of this writing, ‘Brexit’ has not been resolved, even though March 29 was the deadline for the United Kingdom to withdraw from the European Union. 
• China’s weakness (whether due to the U.S. trade conflict or deleveraging measures taken in 2018) is being felt worldwide, particularly in Europe as investors were spooked by a sharp drop in manufacturing activity. 
• Although revised down, U.S. real GDP grew 3% in 2018 and is expected to grow 2.4% in 2019 based on Bloomberg consensus estimates. 
• Following the March meeting, the Fed struck a much more dovish tone on interest rates and balance sheet management than what the market had been expecting. 
• Undergirding capital markets is the fact that global financial conditions remain loose (or are easing) rather than tightening – typically economic contraction occurs as global economy succumbs to the weight of tighter financial conditions (central bank policy, tighter private credit). 
• Between the strong performance in U.S. large caps (small caps and value, not so much) and corporate credit along with a bull steepener in the yield curve, we could be seeing a set-up for renewed risk-taking as the market has been given the all-clear from the Fed that rates are not going up anytime soon, barring a major inflation scare.

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