Spruce Index Returns March 2019-with New Charts
In the month of March, global risk assets powered higher including a +1.26% gain for global stocks and +1.92% for the Barclays bond aggregate index.
The S&P 500 Index gained +1.94% and is now up +13.65% year to date and +9.50% over the last twelve months. Real estate and technology led the way with returns of +4.95% and +4.77% respectively. A flattening yield curve punished banks which declined -2.56% and -4.86% over the last year. Small cap stocks also declined -2.09%.
Overseas, the UK rallied +2.89% as that country weighs a Brexit “do-over” vote. Returns for Japan and broader EAFE developed countries were otherwise muted. In emerging markets, the broader global index generated +0.84% returns led by India’s +6.27% and China’s +2.44%. India’s economy continues to recover from weakness in 2018. China’s industrial and export data is suggesting a nascent 2019 recovery is underway. Turkey and Argentina both experienced significant declines in the month of -10.95% and -8.47% . Turkey’s assets sold off after renewed friction with the United States over a jailed American pastor. Credit default swaps rose significantly, the currency declined and bond spreads over treasuries widened to 2009 levels. Argentina’s economy is shrank -2.5% in 2018 and widening credit spreads, currency flight and fears over the upcoming election all stoked renewed volatility. Argentine is seeking rescue financing from the IMF.
In terms of factors, U.S. quality and momentum gained +3.05% and +2.84% respectively. The same outperformance occurred globally. Value trailed both in the U.S. and globally. Value stocks may need to see a period of rising interest rates in order to outperform growth.
Commodities overall enjoyed a modest gain of +0.17%; however, crude oil rallied +4.37% on global supply tightening. Brent crude is now up +29.36% this quarter gaining back much of what it lost in 2018. It remains, for the moment, down -4.20% over the last year.
The bellwether ten year Treasury yield rose slightly to 2.72% which is almost identical to its 2.74% level from a year ago. In Japan and Europe bond yields continue to decline into negative territory led by Germany’s three month T-bills at -0.017% and Japan’s ten year at -0.02%. Credit spreads receded across the board from AAA credit to BBB to CCC. Bitcoin, in a sign of life, rose +6.67% and is up +8.05% year to date.
Concerns over flattening yield curves continued with the 2/10 at very low levels. Flat yield curves can suggest slow future economic growth while inverted curves can foreshadow a recession in 12-24 months. For now it appears the bond market believes future economic growth will be slow/modest.
Equity valuations remain reasonable in the 17X-19X range, and equity volatility continues to recede after the fourth quarter’s spike.
Financial conditions, after dropping in Q4, have become looser thanks to the Fed pause in hiking interest rates. Conditions are also getting looser in emerging Asia as China cuts interest rates, drops bank reserve requirements, and extends bank credit. Europe, however, continues to weaken and is the weak spot in global growth. Manufacturing, sentiment and export volumes are all declining although China is expected to give a boost to trade.
It appears that much of the world, sans Europe, is experiencing a renewed “goldilocks” environment that is conducive to decent equity returns. Recovering global growth, low interest rates, dovish central banks, and solid corporate earnings are all combining to rally risk assets. The next hurdle is corporate earnings season which is about two weeks away. Markets are expecting high single/low double digit growth.