Market Index Returns April 2019

In the month of April risk assets continued the first quarter’s gains with global stocks up +3.38% and the S&P 500 Index gaining +4.05%. Investors are feeling relatively confident in light of an accommodative Federal Reserve, solid manufacturing growth (PMIs at 55.3), continued corporate earnings growth, expectations for a recovering Chinese economy and hopes for a positive resolution to the US/China trade negotiations. Additionally, U.S. payrolls continue to show signs of strength with the unemployment rate remain below average at 3.8% and wage growth increasing to 3.3%. Inflation is low at just under the Fed’s 2% target.

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In the U.S., the financials led all sectors with +8.98% on the month, followed technology which gained +6.36% in April and is up +27.40% on the year. Consumer discretionary was up +5.46% for a total of +21.68% since January 1. Healthcare continues to lag with a loss of -2.71% in April due to renewed bipartisan calls for lower pharmaceutical drug prices. On the year healthcare is up a modest +3.56%, dramatically underperforming the broader S&P 500 by almost 15%. Energy also weakened with energy equities and MLPs down -0.02% and -1.33% on the month.

Overseas, Europe led all regions with a gain of +3.69% amidst signs of modest “green shoots” of economic growth and growing calls from value investors who believe the region is undervalued. The U.K. and Japan both gained around 2%. Emerging markets also gained approximately 2% led by Russia and China at +3.79% and +2.14% respectively. Emerging market laggards included Argentina which was down -8.33% in the face of rising inflation, which is up 55% year over year and 4.7% in March.

In terms of U.S. factors, value and quality gained +4.08% and +3.55% in April. On a year to date basis, only quality has outperformed the S&P 500 whereas dividends are materially underperforming due to a steepening yield curve. On a global basis, quality and momentum gained +3.64% and +3.13%, with quality the only factor beating the MSCI All Country World Index on the year to date basis. Investors’ fears of a global slowdown or recession has led to increased demand for stocks with quality balance sheets and sustainable earnings.

The broad commodity index was relatively flat on the month; however, that masked underlying volatility with gold declining -7.77% and Brent crude oil gaining +6.53%. Supply concerns drove oil prices higher after the U.S. planed to end its waivers over sanctioned Iran oil.

In bonds, 10-year yields remained low with the U.S. Treasury at +2.41% and Germany’s equivalent at -0.07%. Japan’s 10-year yield is -0.08% and Switzerland‘s is -0.38%. Heightened U.S. rates help to keep the U.S. Dollar strong relative to negative yielding currencies. Credit spreads continued to narrow with AAA credit at 0.84% and CCC at 8.0%.

From our chart book, attached, we note several items. First, homebuilders and retailers, both early cyclicals, are outperforming the S&P 500 which is encouraging. Declining interest rates are likely a boost to both industries. New and existing home sales seem to be recovering from their lows in October 2018.

Corporate earnings are solid and the number of companies issuing up versus down profit outlooks has stabilized after a weak first quarter outlook.

Financials continue to underperform non-financials.

Consumer sentiment is back to its 2018 level and margin debt, i.e. investment leverage, has increased. Consumers and investors are in a “risk on” mood.

Technical indicators suggest the S&P 500 is overbought although that level is declining rapidly in May.

The 2Y -10Y yield curve remains positive at 20; however, the 3M-10Y is again weakening at 2.7. Near term forward spreads, i.e. the market’s best guess for interest rate policy six months hence, suggests a single 25 basis point rate cut. Worryingly, the probability of a recession in twelve months continues to increase to 27.49, a marked increase since October 2018. The current level suggests the risk should be taken seriously because, historically, a recession actually did occur in all but two prior examples dating back to 1969.

Emerging markets are again underperforming the U.S. in spite of the reverse occurring in financial conditions, i.e. the U.S. is getting tighter while China is getting looser. Tighter financial conditions in the U.S. tends to weigh of the remaining emerging markets countries, excluding China.