Portfolio & Market Review: February 2019
Global stock markets continued their 2019 rally in February as investor sentiment remained positive given progress in trade talks between the US and China and more clarity regarding the US Federal Reserve’s interest rate policy. Global stocks increased by 2.5% bringing year-to-date returns to 11%. As anticipated, investors were most concerned about trade and US interest rates, as economic data during the month was mixed. On the positive side, fears of a US recession decreased with a rebound in consumer confidence and strong job numbers. However, global manufacturing and growth statistics continued their recent trends lower and US business confidence and investment worsened.
US stock prices gained 3.5%, led by small-cap stocks which were up over 5%. The two-month rally in US stocks left prices within 5% all-time highs reached in late September 2018. Stock prices are reflecting firm ongoing economic growth in the US. 4Q 2018 GDP, delayed because of the government shutdown in January, came in above-trend at 2.6%. Corporate earnings in 4Q 2018 were better than anticipated but estimates for the calendar year 2019 continue to be revised downward due to moderating, but still positive, growth and rising labor costs.
International equity returns were positive, albeit with a wide dispersion. In the developed world, European stocks finished up 4% and Japanese stocks were up 3%, while emerging markets ended the month relatively flat. In Europe, the political environment and economic slowdown continue to be areas of concern for the markets. The European Central Bank (ECB) warned that the slowdown in the eurozone was “broader and more persistent”, leading to speculation that the ECB will look to issue new liquidity to assist the banking sector. In the UK, uncertainty around Brexit continues to weigh on business sentiment as the March 29th deadline approaches.
Bond yields across the globe remained flat as weaker economic data and accommodating talk out of the world’s central banks worked as counteracting forces. High yield bonds had a good month, up 1.5% as investors looked to further capitalize on higher yields in the wake of the December selloff and waning fears of an imminent recession. Emerging market debt returned 1% as the asset class benefited from a flat dollar, stable treasury rates, and higher oil prices.
The extreme pessimism that shocked the markets last December has given way to more optimism this year. The most recent discussions regarding trade with China along with the change in the Fed’s interest rate policy, have managed to ease the headwinds to higher asset prices. However, many risks remain. Earnings are likely to continue to decline as corporate profit margins remain under pressure, European growth slows, and optimism regarding trade talks could change with a tweet. While the recent rally in equities is welcome, our enthusiasm remains tempered. As we have said before, we are in the later stages of the current economic cycle. The Fed’s decision to pause its interest rate hikes likely kicks the recession can down the road, but the question remains…how far down?