A View from February
January was intense. Arctic blasts brought the coldest US temperature readings of the 21st century. Inversely buoyant stock prices generated the all-time single largest month of dollar value gain for the S&P 500. Somewhere in the middle…two of the three branches of government conspired to shut down for the longest period in US history.
With all that was January 2019, we are quite content to move into February. From our current perch, we have several themes to unpack, items to highlight, and observations to share with you.
January Returns – Historically, a strong January for stocks has foreshadowed above-average full-year returns (S&P 500 total return last month was +8.0%). Interestingly, 2018 was one of the few years where this trend did not hold. However, sentiment entering 2019 is well below the lofty expectations of one year ago.
Soft Data vs Hard Data – The term “soft data” refers to qualitative information, such as consumer confidence and manufacturing surveys. Alternatively, “hard data” refers to concrete economic statistics like employment, wage growth, and profit margins.
In January, we saw a divergence between soft data points and hard data points. The former suffered from exogenous shocks coming in the forms of volatile equities, political rancor, global growth concerns, and trade ambiguity. However, “hard” economic data in the US remained comparatively resilient. For example, our economy added 304k jobs last month (a 100th straight month of gains, and above expectations).
Reduced Expectations – Speaking of expectations, January brought about a significant change in expectations for the Federal Reserve. To close 2018, the Fed continued to suggest a steady diet of interest rate hikes this year. In January however, the Fed pivoted, communicating that any increases would be “data-dependent.” This opens a possibility of no additional hikes this year, which is the market expectation.
In addition, corporate expectations were lowered amid the equity malaise of late 2018. Interestingly, even companies that are missing published consensus estimates this earnings season are seeing higher stock prices. This is uncommon, and is suggestive of low expectations.
International Returns – Stock markets outside of the United States have consistently lagged our home market since 2009. For 37 straight quarters, the S&P 500 has owned a better three-yr total return figure than the MSCI EAFE (a developed market international index). We see opportunity here. Lagging performance has depressed sentiment, which in turn has lowered valuations for international stocks.
Q4 Post-Mortem – We would certainly like to forget the volatility of late last year. But we believe a valuable exercise is to evaluate the performance of portfolios. Did our holdings perform as expected given market conditions? We encourage you to work through this question with your Wealth Advisor. Your advisor can suggest any necessary revisions to your investment allocations.
– Mark K. Nickel, CFP, CIO
Name to Know for January
U.S. Trade Representative
Lighthizer was sworn in as the 18th U.S. Trade Representative (USTR) in May 2017. He has focused his career in international trade law, serving in both the public and private sectors. He is a key figure in formulating the Trump Administration’s trade policy.
Lighthizer is a noted China hawk, defending the use of protectionist tariffs and arguing for serious reform on intellectual property theft and technology transfer, among other items. With the March 2 deadline to reach a China trade deal looming, Lighthizer will serve a lead role in trade discussions and formulation of any subsequent policy changes.
US Equities: The S&P 500 lost 9.0% last month, the worst December since the Great Depression.
Global Equities: International outperformed US in December, with Emerging Markets and Developed ex-US down only 2.7% and 4.9%, respectively.
Federal Reserve: Futures are now implying a higher percent chance of a rate cut than a hike in 2019, clashing with Fed projections.
US Treasuries: 10-year and 2-year Treasury yields were 2.66% and 2.50%, respectively, as of Jan. 2. The 2/10 spread held between 10 and 20 bps for the duration of December.
US Credit: Investment Grade and High Yield corporate bonds yield an average of 1.72% and 5.26% over Treasuries, respectively. High Yield spreads widened over 115 bps in December.
Markets Rundown Source: Bloomberg
Each client’s investment needs, risk tolerance, and goals are different. This newsletter is not meant to be advice for any specific investor. Nothing in it should be construed as an offer to sell, or a solicitation of an offer to buy, any securities. This should not be used as the sole basis for an investment decision. Any opinions or estimates are subject to change without notice. For information about how any of this information applies to your personal financial situation, please contact your Wealth Advisor.
Past performance is not a guarantee of future results.
Although the information provided to you in this newsletter was obtained or compiled from sources that we believe are reliable, J.J.B. Hilliard, W.L. Lyons, LLC cannot, and does not, guarantee that the information or data is accurate, timely, valid, or complete.
All investing involves risk, including the possible loss of principal. You should carefully consider investment objectives, risks, charges, and expenses of any investment before investing. Diversification and asset allocation do not guarantee a profit or guarantee against a loss.
Stock markets, especially foreign markets, are volatile and can decline significantly in response to adverse issuer, political, regulatory, market or economic developments. The bond market is also volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect can be more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks.