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Market Commentary

February 2019 Market Commentary – Mixed Signals Can Lead to Crossed Wires

Benjamin Lavine, CFA, CAIA

• Global stocks returned 2.7% led by Europe and the U.S., up 3.4% and 3.2%, respectively; Emerging Markets and Japan lagged returning 0.2% and 0.0%, respectively. 
• S&P 500 rose 3.2%, led by cyclical and some defensive sectors like Utilities; while consumer sectors and other defensive sectors lagged. 
• S&P Small Cap Index was up 4.4%, though outperformance over large caps narrowed towards end of month. 
• U.S. thematic, risk-based factors: Quality, Minimum Volatility, High Dividend, and Momentum outperformed the broader market; Value underperformed. 
• Fixed income: U.S. High Yield continues to benefit from the beginning year risk-on rally, returning 1.7%. Broader investment grade market was flat, while international fixed income underperformed largely due to a strong U.S. dollar. 
• 10-Year U.S. Treasury Yield floated around a tight range of 2.60-2.70%, ending at 2.72% at month-end. 
• Investors continue to look past the weakening macroeconomic and earnings environment: 1) China: signs of increasing fiscal and monetary stimulus (rising credit, tax cuts, increased government borrowing) to boost a slowing economy; 2) Global Central Bank easing and the willingness of the U.S. Federal Reserve to let inflation run above target for the time being. 
• Investors hopeful of a near-term resolution to the U.S./China trade conflict with an expected deal to be signed in Mid-March, as well as a BREXIT delay.   
• Can the Fed and China engineer a soft landing that maintains the current global growth cycle, while not prompting global central banks to tighten? This remains the central macro issue for 2019.

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