April 08, 2019

Monthly Market Summary – March 2019

For most of March, the global equity markets continued the rebound seen in January and February spurred by indications of progress in the U.S./China trade talks and dovish central bank actions.  The rally was muted at times during the month by mixed economic data reports.  Importantly, investor sentiment was shaken in the second half of the month by an unexpectedly weak report on manufacturing activity in Germany which spurred renewed worries about the rate of the deceleration in the global economy.  That report fueled a “risk-off” mood which pushed global equity prices lower and led to a global bond market rally.  During this bond market rally, the U.S. yield curve flattened and parts of the curve became inverted as longer maturity bond yields declined more than shorter-term yields.  The benchmark U.S. 10-year Treasury bond yield briefly fell to just below the yield on the 3-month Treasury bill.  It was the first time since 2007 that the 10-year yield fell below the 3-month yield.  This inversion, or negative spread between the 10-year and 3-month yield, is watched closely by many invstors since such a negative spread has occurred before most U.S. recessions.  However, the time period between when the yield curve inverted and the recession occurred has varied widely.  The bond rally also resulted in the yield on the German 10-year government bond dropping into negative territory for the first time since 2016.

Market Indices – March 2019

Manufacturing and industrial activity data was the main area of weakness in the economic reports.  Not only did Germany’s manufacturing output growth slow to the lowest level in nearly six years, but industrial production in Japan declined almost 4% from a year earlier and in China industrial output grew at the slowest pace since 2002. In the U.S., the jobs report disappointed investors by showing only 20,000 new jobs were created in February, which was the lowest number of new jobs in 17 months.  Housing activity also disappointed since new home sales and housing starts declined more than expected.

As a result of weakening economic indicators and data showing still low rates of inflation, the Federal Reserve (Fed) and the European Central Bank (ECB) cut growth forecasts for the U.S. and eurozone and shifted to more accommodative positions.  Both the Fed and the ECB Governing Council indicated they would likely not raise their policy interest rates this year.  The Fed also said it would end its balance sheet reduction plan in September.  The ECB initiated a new stimulus program of injecting more liquidity into the eurozone’s banking system.  Stimulus actions were not limited to the U.S. and Europe.  China made another move aimed at stimulating its economy when the government announced a reduction in the value added tax for manufacturing, construction, and transportation industries.

In the U.S. equity market, large and mid-size stock indices ended March with positive returns.  However, the small stock index had a negative return due to having more exposure to the weak financials and healthcare sectors.  Financials was one of the weakest performing sectors across the market cap spectrum due to the negative impact on financial company earnings from declining interest rates and a flattening yield curve.  Healthcare was another weak sector in each market cap category on increasing regulatory risks as health insurance and pharmaceutical pricing returned to be a focus for politicians.  Information technology was one of the top performing sectors boosted by better than expected earnings news.  Energy was another top performing sector in the mid and small-cap indices benefiting from the continuing rise in oil prices.

In foreign equity markets, both the MSCI EAFE index of developed market stocks and the MSCI Emerging Markets index (EM) posted a positive return for March.  Currency had a small negative impact on returns for U.S. investors for both the EAFE and EM index.  Growth stocks outperformed value stocks in both the EAFE and EM index.  On a geographic basis, Latin America was particularly weak with Brazil and Chile posting some of the largest declines.  Germany was the worst performing developed country, hurt by weaker than expected industrial activity reports.  India had one of the largest gains due to optimism that Prime Minister Modi’s party will do well in the upcoming elections.  China, which had rallied sharply in January and February, cooled in March but still had one of the best country returns for the month.  Despite the continuing dispute over a Brexit agreement, equity prices in the United Kingdom rose in March.

U.S. bond market returns were positive across all sectors in March.  Bond prices rose, and yields declined, after the Fed indicated that it would likely not raise is policy interest rate in 2019 and after the weak German manufacturing report.  The 10-year Treasury bond yield declined to 2.4%, the lowest level since December 2017.  The yield at the end of February was 2.7%.  Bonds with longer time to maturity had larger gains than shorter maturity bonds.  The U.S. Corporate High Yield index had one of the lowest returns for the period.

The Bloomberg Commodity index had a return of -0.2% for March.  Returns were mixed for the sub-indices.  The livestock sub-index was the top performing sector gaining over 6% for the month.  China has increased its purchases of pork significantly as that country deals with a swine flu epidemic.  The petroleum sub-index was also a top performing sector as oil prices rose due to supply cutbacks by the Organizations of Petroleum Exporting Countries (OPEC) and sanctions on Iran and Venezuela.  The industrial metals sub-index had a small positive return in reaction to China’s stimulus actions and positive reports about U.S./China trade talks.  The precious metals sub-index had a negative return as both gold and silver prices moved lower.  The grains sub-index also posted a negative return due to high inventory levels.

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.