February 13, 2019

Monthly Market Summary – January 2019

Economic slowdown concerns that dominated markets in the fourth quarter of 2018 eased during January triggering a rally in finanical markets in the U.S. and globally.  Investors received the first piece of reassuring news with the very strong U.S. jobs report that showed payrolls increased by 312,000, which was well above estimates.  In addition, the labor force participation rate increased to 63.1% and wages rose with a 3.2% gain on a year-over-year basis.  Other key positive developments were generally better than expected guidance about future corporate earnings, positive news from U.S./China trade talks, and dovish comments from the Federal Reserve (Fed) regarding the outlook for its future rate hikes and balance sheet reduction.  These positive news items largely took the focus off reports of slower manufacturing and service sector activity around the world and data that showed a slowdown in China’s economy, such as China’s gross domestic product growth rate dropping to 6.4%, the slowest growth rate in a decade.

 

Market Indices – January 2019

Even though equity markets rallied in January, volatility continued.  For example, early in the month, Apple, Inc. warned of a revenue shortfall from the iPhone, which sent technology stocks down sharply on the day of the announcement.  However, the strong U.S. jobs report, news that China’s central bank lowered reserve requirements, and reports that trade talks between the U.S. and China were back on sent stocks sharply higher the next day.

In the U.S. equity market, mid and small-capitalization (cap) stocks outperformed large-cap stocks with mid and small-cap indices posting double-digit gains.  Growth stocks outperformed value stocks in the mid and small-cap categories, while value outperformed growth in the large-cap index.  As the equity market rebounded, sector returns were the opposite of returns in the fourth quarter of 2018 when worries and pessimism drove equity prices sharply lower.  In January, each of the 11 sectors had a positive return with energy, materials, and industrials being the top performers and the defensive sectors of utilities and consumer staples posting the lowest returns.  Healthcare was also weak in the large-cap index.

Equity markets rebounded outside the U.S. as well.  International and emerging market stocks rose despite more signs of economic slowing in key European economies and China – boosted by the positive response to actions by China intended to stimulate economic growth and signs of possible progress in U.S./China trade talks.  The dovish comments from the Fed were positive for emerging market currencies so currency movements provided a boost to returns for U.S. investors.  There was little difference between the return for growth and value stocks in the EAFE index, but growth outperformed value in the emerging markets index.  Just as in the U.S., the more economically sensitive sectors, such as consumer discretionary, financials, and energy were the best performing sectors and the more defensive sectors had the lowest return in both the EAFE and emerging markets indices.  On a geographic basis, oil heavy economy countries, including Canada, Brazil, and Russia had the highest returns for the period.  Optimism for business–friendly reforms under the newly installed President provided an additional boost to stocks in Brazil.  France was one of the weakest performing countries hurt by the impact of the continuing Yellow Vest protests.  India was one of the only countries to post a negative return for the month, after being a top performer in the fourth quarter, hurt by the impact of higher oil prices since India is a heavy importer of oil.

U.S. bond market returns were positive in January for all sectors.  Corporate bonds generally outperformed Treasury bonds as investors’ appetite for risk returned after the flight to safety trading seen during the fourth quarter of 2018.  The high yield bond index had the best return.  That index has a large weighting in energy company bonds and the rally in oil prices provided a boost to prices of energy related bonds.  In the Treasury bond market, the yield curve flattened.  At month-end, yields on bonds with maturities from three-months out to five-years were at 2.4%.  The 10-year Treasury bond yield was only slightly higher at 2.6% and the 30-year bond yield was 3.0%.

The Bloomberg Commodity index had a return of 5.5% for January.  The petroleum sub-index was the top performing sector gaining about 14% for the month.  Oil prices rose in January due to the drawdown in inventories, possible sanctions on Venezuelan oil, and expectations for improving demand from China after the government took additional stimulus actions.  The price of West Texas Intermediate crude oil rose to end the month at $54 per barrel, which was up from $45 at year-end 2018.  The industrial metals sub-index also had a strong return on improving sentiment about economic growth due to China’s stimulus actions and signs of possible concessions in the U.S./China trade talks.  The precious metals sub-index had a small positive return as both gold and silver prices moved higher.  The agriculture sub-index also posted a small positive return despite livestock prices moving lower.

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.