May 06, 2019
Monthly Market Summary – April 2019
During April, the global equity markets trended gradually higher boosted by easier monetary conditions, better than expected corporate earnings reports, and signs of improvement in certain economic data in the U.S. and China. The S&P 500 index hit a new record high on April 22, so the entire fourth quarter 2018 near bear market drop has been reversed. The index went on to set several additional new highs before month-end. The Nasdaq index also reached several new highs.
Market Indices – April 2019
Corporate earnings growth surprised to the upside. A majority of companies that released first quarter results reported earnings above analysts’ estimates. Certain companies had much better than expected results, such as JP Morgan, Facebook, and Amazon. However, not all earnings reports were good. Some significant disappointments caused the price of those stocks to sink, including 3M, UPS, Intel, and Google. An important aspect of the earnings season is that estimates for future earnings have been trending higher, which is a change from the prior two quarters when estimates of future earnings growth were being lowered.
On the economic news front, much of the data reported in the U.S. was better than expected. For example, the March jobs report showed a strong rebound in the number of new jobs added after the weak February report. Durable goods orders rose by 2.7% rebounding from a decline of 1.1% the prior month. First quarter gross domestic product (GDP) grew 3.2%, which was well above the 2.5% that was expected and the 2.2% fourth quarter growth rate. Surprisingly, inflation in the U.S. remains low even with rising wages. The core personal consumption expenditures deflator measure of inflation rose a less than expected 1.3%, which is well under the Federal Reserve’s 2% target. Outside the U.S., China also reported some better than expected data. For example, China’s GDP growth came in at 6.4% compared to the 6.2% that was expected. In addition, China’s manufacturing data improved and moved back into expansion territory for the first time in four months. In Europe, the data continues to be mixed. GDP growth ticked up with France and Spain showing the highest rates of growth. In Germany, the important manufacturing sector continues to slow with new orders dropping 4% in the latest report. On a positive note, construction activity in Germany picked-up.
Also of note is that during April the U.S. dollar strengthened to the highest level since early 2017. The dollar rose in reaction to stronger economic growth in the U.S. than in much of the world and to the large interest rate differential. U.S. bond yields have been trending higher while government bond yields in Japan and much of Europe are in negative territory. The level of the dollar bears watching since a high dollar can make U.S. exports less competitive and can lower earnings of multinational companies.
Major U.S. equity indices ended April with positive returns. The large-capitalization (cap) index outperformed the mid-cap index, which outperformed the small-cap index. Value stocks outperformed growth stocks in the large and small-cap indices while growth outperformed value in the mid-cap index. The financials sector had the best return in the large-cap index boosted by better than expected earnings for several banks, insurance companies, and money management firms. The information technology and communication services sectors were back in favor due to good earnings reports and positive outlooks and were among the top performing sectors in each market cap category. Healthcare was the worst performing sector, with a negative return, in each market cap category hurt by the “Medicare for All” talk by politicians. The high dividend sectors of utilities and real estate were also weak performers for the month as interest rates moved higher and market participants favored cyclical sectors.
Both the MSCI EAFE index of developed market stocks and the MSCI Emerging Markets index (EM) posted a positive return for April. However, those returns trailed U.S. equity index returns. Currency movements reduced the return to U.S. investors from foreign equity investments since the U.S. dollar strengthened. Growth stocks outperformed value stocks in both the EAFE and EM index. In the developed international markets, healthcare and high dividend sectors had the lowest returns for the month while financials and industrials were the top performing sectors. In the emerging markets, consumer discretionary, information technology, and communication services were the top performing sectors and utilities and materials had the lowest returns. On a geographic basis, among developed international markets, European country indices had the best returns. Among emerging markets, European and Middle Eastern country indices had the best returns.
U.S. bond market returns were mixed but mostly positive for April. Yields across the Treasury bond maturity curve moved slightly higher during the period as certain economic data firmed. After the brief period with an inverted yield curve in March, yields steepened in April with longer-maturity bond yields increasing more than short-maturity bond yields. The 10-year Treasury bond and the 3-month Treasury bill yields were 2.51% and 2.45% respectively on April 30 compared to 2.41% and 2.40% respectively at the end of March. Corporate bonds outperformed Treasury bonds on improving economic and solid earnings data along with strong demand. The corporate high yield bond sector had the highest return among the major fixed income sectors. Municipal bonds prices also rose during the month due to strong demand.
The Bloomberg Commodity index had a return of -0.4% for April. Of the sub-indices we track, only the energy index had a positive return for the month boosted by the increase in the price of oil. The price for West Texas Intermediate crude oil (WTI) rose as much as 10% during the month to just over $66 per barrel after President Trump ended waivers for sanctions on oil imports from Iran. The price of WTI dropped back to about $63 at month-end.
Vogel Consulting, LLC (Vogel) Tactical Recommendations
Our tactical allocation recommendations include an equal weight to U.S. large-cap, mid-cap, and small-cap stocks and to developed international equities. We recommend an overweight to emerging markets equities due to favorable relative valuations and growth potential. Within our equal weight fixed income recommendation, we continue to favor short to intermediate maturities. We continue to recommend an underweight allocation to hedge funds. Since our expectation is for a moderate rate of inflation, we recommend an equal weight to real assets. We continue to recommend an overweight to cash reserves that includes adequate cash to support spending needs over the coming 12-24 months since we expect financial markets to continue to experience bouts of heightened volatility.
The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance. Past performance does not guarantee future results.
The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group. An index is not managed and is unavailable for direct investment.