April 2018

April 2018 2018-05-14T13:24:26+00:00

US equity markets continued to exhibit substantial volatility in April, as investors sought to understand the implications of evolving policies on trade, especially with China and our North American neighbors; geopolitical machinations on the Korean Peninsula and in the Middle East; and the economic effects as stimulative fiscal policy begins to take effect in an economy that’s already growing. Corporate earnings reports, which most analysts expected to be strong, exceeded even those high expectations, but stocks did not respond with any kind of strength in prices. This cement-mixer market (spinning, but not going anywhere) produced a return of +0.38% in the S&P 500 index. The Mid-cap 400 index returned –0.26%, and the Small-cap 600 returned +1.03%. [Index returns: Standard and Poors]

 

While US markets manifested uncertainty, other equity markets around the world performed strongly. The strength may reflect opportunities that could emerge for trade among Asian and European economies as a result of evolving US trade policies. The MSCI EAFE international equity index returned +4.50% in local currencies. The US dollar strengthened, rising to 109.28 yen, from 106.20 a month earlier, and ending April at $1.2074 against the euro and $1.3751 to the pound Sterling, from levels of $1.2320 and $1.4027, respectively, at the end of March. The currency movement worked against US investors, and EAFE returned +2.28% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 Release]

 

The Federal Reserve continues to signal its plans to tighten monetary policy, and market participants have become concerned with a possible resurgence of inflation. Accordingly, interest rates rose during the month. The yield on the two-year US Treasury note ended April at 2.49%, up from 2.27% at the end of March. The ten-year yield briefly touched three per cent., but ended the month at 2.95%, compared to 2.74% a month earlier. Due to the rise in rates, the Bloomberg Barclays US Aggregate Bond index returned –0.74 for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

 

The markets’ upward year-end momentum carried strongly into January, carrying stocks to a sharp advance that lasted for most of the month. Economic news and corporate earnings were reasonably good, though not exceptional. Toward the end of the month, however, the market changed direction. Stocks fell back in the month’s final couple of days, a decline that intensified and carried through most of February. The change in direction may have to do with an uptick in interest rates, which in turn seemed to relate to concerns over the likelihood that the new tax law, in combination with the spending package Congress subsequently passed, will result in a substantial issuance of US Treasury securities, and with it, the possibility of a resurgence in inflation. Intensifying the market’s volatility in March was the Adminstration’s surprise announcement of protectionist trade measures. As Administration officials have struggled to articulate a coherent policy, and our key trading partners have responded, a picture has emerged of an erratic, half-baked stance toward global trade. The market has generally fallen on news of protectionist measures, and rallied when officials have suggested that the measures the Administration has announced are not serious, but merely negotiating positions. For all the action, the S&P 500 index ended the quarter close to where it began, returning –0.76% for the period. The Mid-cap 400 index returned –0.77%, and the Small-cap 600 returned +0.57%. [Index returns: Standard and Poors.]

Global markets reflected a similar level of uncertainty. The MSCI EAFE international equity index returned –4.28% in local currencies for the quarter. The US dollar fell sharply against other currencies, possibly in response to the same inflation fears that touched the US equity market in February. The dollar fell to 106.20 yen at March 31, from 112.69 at the end of December. It also weakened to $1.2320 against the euro and $1.4027 against the pound Sterling, from year-end levels of $1.2022 and $1.3529, respectively. Overall, the currency movement was favorable to US investors, and EAFE returned –1.53% in US dollars [Index returns: MSCI; Exchange rates: Federal Reserve H.10 release]

The Federal Reserve’s new Chair, Jerome Powell, signaled the Fed’s intention to continue its slow-motion tightening of monetary policy, and rates rose across the yield curve. The yield on the two-year US Treasury note rose to 2.27% at the end of March, from 1.89% at the end of December. The ten-year yield ended March at 2.74%, up from 2.40% at the end of December. The Bloomberg Barclays US Aggregate Bond index returned –1.46% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]

The market volatility that suddenly erupted during February continued during March. Economic indicators remain reasonably strong, but the market reacted badly to the Administration’s sudden, unexpected announcement of an aggressive tariff posture, initially focusing on steel and aluminum, but expanding more generally. As Administration officials have struggled to articulate a coherent policy, and our key trading partners have responded, a picture has emerged of an erratic, half-baked stance toward global trade. The market has generally fallen on news of protectionist measures, and rallied when officials have suggested that the measures the Administration has announced are not serious, but merely negotiating positions. As the immediate effects of trade conflicts weigh most heavily on large firms with global markets, the S&P 500 index bore the brunt of the uncertainty, falling by –2.54% for the month. Smaller stocks had gains – the Mid-cap 400 index returned +0.93%, and the Small-cap 600 returned +2.04%. [Index returns: Standard and Poors]

International equity markets also fell. The MSCI EAFE international equity index returned –2.23% in local currencies. The US dollar fell modestly against foreign currencies. It slipped to 106.2 yen from 106.62 at the end of February. It also weakened to $1.2320 against the euro (compared to $1.2211 a month earlier), and $1.4027 against the pound Sterling (compared to $1.3794). Remember that we quote yen per dollar, but we quote dollars per euro and pound. Accordingly a weakening dollar means a lower quote against the yen, but higher quotes against the euro and pound. The slightly weaker dollar helped US holders of overseas assets, so EAFE’s loss was a bit less, –1.80%, in US dollar terms. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

The possibility that trade conflicts might weaken the US economy resulted in a drop in long-term interest rates. Also helping moderate interest rates is a general view among market participants that new Federal Reserve Chair Jerome Powell has been acquitting himself well, and will be a steady hand in his role. While the yield on the two-year US Treasury ticked up to 2.27% at the end of March, from 2.25% a month earlier, the ten-year yield fell to 2.74%, from 2.87% a month earlier. The Bloomberg Barclays US Aggregate Bond index returned +0.64% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

The steady, broad market advance of the past months abruptly lost its momentum shortly after the start of February. The US stock market fell sharply for several days. Some saw the move as partly a re-setting of market valuations after that momentum had carried prices so high. Others pointed out that the combination of the tax bill Congress enacted late last year, along with the spending package they subsequently passed, will lead to both a strong fiscal stimulus and a significant increase in US Government borrowing. The trouble with the fiscal stimulus is that it comes at a time when the economy has been strong, and a more traditional policy prescription would call for fiscal restraint. Accordingly, an increasing number of investors have begun to express concerns that the economy might overheat, leading to inflation and an acceleration of monetary tightening by the Federal Reserve. The market did bounce back strongly from the worst of its losses, and the broad averages ended February at around the same levels at which they had closed out 2017. For the month, the S&P 500 lost –3.69%, the Mid-Cap 400 index lost –4.43%, and the Small-Cap 600 index returned –3.87%. [Index returns: Standard & Poors]

International stocks followed a pattern similar to those in the US, and the MSCI EAFE international equity index returned –3.26% in local currencies. Expectations that US interest rates might increase tended to push the US dollar higher against European currencies. The dollar strengthened to $1.2211 against the euro, from $1.2428 at the end of January, and it also firmed to $1.3794 against the pound Sterling, from $1.4190. The Japanese yen strengthened even more than the dollar, so the US currency ended February at 106.62 yen, down from 109.31 a month earlier. The currency movement worked against US investors, and EAFE returned –4.51% in US dollars for February. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

As many anticipated, interest rates did rise across the spectrum of maturities. The yield on the two-year US Treasury note ended February at 2.25%, up from 2.14% at the end of January. The ten-year yield rose to 2.87%, up from 2.72%. Falling bond prices reflected this increase in rates, and the Bloomberg Barclays US Aggregate bond index returned –0.95% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

The markets’ upward year-end momentum carried strongly into January, carrying stocks to a sharp advance that lasted for most of the month. Economic news and corporate earnings were reasonably good, though not exceptional. Toward the end of the month, however, the market changed direction. Stocks fell back in the month’s final couple of days, a decline that intensified during the initial trading days of February. The change in direction may have to do with an uptick in interest rates, which in turn seems to relate to concerns over the likelihood that the new tax law will result in a substantial issuance of US Treasury securities, and with it, the possibility of a resurgence in inflation. Through January 31, the S&P 500 index returned +5.73%. (It has subsequently given back this entire gain.) The Mid-cap 400 index returned +2.87%, and the Small-cap 600 index returned +2.53%. Growth outperformed value in all market capitalization ranges. [Index returns: Standard and Poors]

International stocks drifted a bit higher; the MSCI EAFE international equity index returned +1.20% in local currencies. The US dollar fell sharply against other currencies, possibly due to those inflation worries, and perhaps due in part to the peculiar comments the US Treasury Secretary made at the World Economic Forum in Davos, where he suggested that a weaker dollar would be good for US business. The dollar fell to 109.31 yen from 112.69 a month earlier. It also weakened to $1.2428 against the euro and $1.4190 against the pound Sterling, from year-end levels of $1.2022 and $1.3529, respectively. The currency movement was strongly favorable for US investors, and EAFE returned +5.02% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 Release.]

Interest rates moved sharply higher during January. In addition to worrying about inflation and a large increase in Treasury issuance, market participants also took note of signals from the Federal Reserve that it would continue to pursue a policy of monetary tightening under its new Chair, Jay Powell. The yield on the two-year US Treasury note rose to 2.14% at the end of January, from 1.89% at the end of December. The ten-year yield rose by a similar amount, ending January at 2.72%, compared to 2.40% a month earlier. Because of the rise in rates, the Bloomberg Barclays US Aggregate Bond Index returned –1.15% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]