Spruce Index Returns February 2019
During the month of February, stocks continued their recovery with MSCI All Country gaining +2.67% in February and +10.78% year to date. While the S&P 500 gained +3.21% on the month, more cyclically sensitive sectors like Technology and Industrials gained +6.91% and +6.37% respectively. Small cap stocks also rallied heavily, up 5.20%, in contrast to the muted 0.27% and 0.54% for MLPs and REITs respectively. In addition, manufacturing measures (ISM Purchasing Manager Index) and manufacturing new orders both maintained high readings over 54 in the month of February. PMIs are an important leading indicator of economic growth.
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Overseas developed equity markets in the MSCI EAFE Index gained +1.91% led by Europe’s +3.16%. Emerging markets saw much larger variations in performance with Argentine, Brazil and Russia declining -10.58%, -5.29% and -2.10% respectively. China rose +3.48% as investors anticipate a trough in economic growth spurred by local monetary stimulus. China PMIs; however, showed continuing weakness with manufacturing PMI at 49 and new exports at 45. Readings below 50 suggest a shrinking manufacturing base.
In terms of factors almost everything seemed to work with U.S. quality and dividends up +4.99% and +4.76%, while global quality rallied 3.73%. Value continues to lag both domestically as well as globally.
Equity valuations have strengthened, particularly for the technology sector with its estimated P/E ratio at 18.5X next year’s earnings. This is materially higher than the 16.7X for the broader S&P 500 Index.
In the short term equities may be overbought with technical indicators such as relative strength suggesting a temporary rest if not pullback.
Across bonds, 10-Year TIPs (inflation protected) and the U.S. Aggregate declined -0.24% and -0.06% as inflation cooled and Treasuries sold off. Inflation spreads imply inflation is running at 1.8% to 1.9%. Risk seeking High Yield gained +1.66% and emerging market bonds rallied +0.62%. The yield on the ten-year Treasury declined to 2.63% from 2.86% a year ago. Falling yields were experienced more broadly with Germany, Japan, Switzerland and the U.K.
Commodities reflected the new “risk-on” attitude of investors with copper and Brent crude oil gaining +5.98% and +5.90%, while safe havens in gold and silver declined -1.24% and -1.62%.
The closely-watched Treasury yield curve is slowly improving with the “10 year-2 year” rising from a December low of 10.7 to today’s 17.9. We see this a modest but positive move. The “30-2” has rallied further moving from a low of 33.28 to today’s 54.9. The curves came close to inverting, often a negative indicator, but gained once the market became convinced the Federal Reserve would stop raising interest rates for the foreseeable future.
Financial conditions in the US continue to dramatically improve from December lows, which is often seen as a positive harbinger for emerging market equities and currencies. Liquidity is becoming looser in the US, Europe and Asia ex-Japan. That said the economic surprises in the US have been weaker, particularly during February. This bears watching as recent economic data has been soft. China and Europe, in contrast, have modestly beaten expectations since mid-January.