April 2019 Market Commentary – King Dollar

Benjamin Lavine, CFA, CAIA


Data Source: Bloomberg

April 2019 Highlights:

  • Global stocks (MSCI All-Country World Index or ACWI) returned 3.4% led by the U.S. and Europe, up 4.0% and 3.6%, respectively while Emerging Markets and Japan lagged returning 2.1% and 1.4%, respectively. 
  • Despite the cyclical rebound in China’s economic activity, Asian export activity continued to decline as has overall business sentiment.  However, Europe’s outperformance suggest that investors are looking beyond weakness in Germany and uncertainty over Brexit. 
  • The S&P 500 rose 4.0% in April, as cyclical sectors generally outperformed defensive sectors.  Financials generally benefited from better-than-expected 1Q2019 earnings, as did growth sectors across communication services, technology, and consumer discretionary.
  • Small caps performed in line with large caps in April while value (led by financials) outperformed growth
  • Among U.S. thematic, risk-based factors, both Quality and Value outperformed the broader market while defensive factors such as High Dividends, Minimum Volatility, and Momentum (which has morphed into Low Volatility) lagged in April.
  • In Fixed income, U.S. High Yield continues to benefit from the beginning year risk-on rally returning 1.4% in April.  The broader investment grade market, represented by the Bloomberg/Barclays U.S. Aggregate Bond Index, was flat for the month while international fixed income underperformed largely due to a strong U.S. dollar. 
  • The 10-Year U.S. Treasury Yield rose from 2.39% in late March to finish at 2.50%, after having risen as high as 2.59% in mid-April. 
  • The 2-10 Year Term structure has steepened a bit from its tight mid-teens range suggesting 1) the Fed will follow the market’s lead and cut rates or 2) inflation will start to pick up, but the Fed will remain on hold and not react to it. 
  • Investor’s strong appetite for ‘paper’ assets came at the expense of ‘hard’ assets as Real Estate and Precious Metals failed to keep up with the market rally (Figure 12).  However, commodities continue to benefit from strong oil prices which have now reached above $60/barrel.
  • The U.S. dollar is king even as the U.S. Federal Reserve backtracks its 4Q2018 hawkish comments and pivots towards a more dovish “reaction function” to inflation or ‘we won’t tighten until we see the whites of inflation’s eyes.’
  • Rather than converging, the U.S. economic growth appears to be diverging from the rest of the world, and investors have responded to this divergence by elevating U.S. asset valuations (stocks, bonds, currency) as king of world asset classes.

By: Benjamin Lavine