Market Reviews 2019

Market Reviews 2019 2019-08-09T14:58:50+00:00

The momentum from the powerful market recovery of June continued, although in somewhat attenuated form, into July. As the month progressed, however, that momentum waned, largely because of an ongoing litany of economic uncertainties. The progress of American trade negotiations with China grew increasingly doubtful. Indications of slower economic growth in Europe coincided with a change of leadership in the UK, adding to uncertainty regarding the mode and implications of the UK’s exit from the European Union. Meanwhile, a rhetorical confrontation between the White House and the Federal Reserve created some confusion as to the likely future direction of monetary policy. On the last day of the month the Federal Open Market Committee did in fact lower its policy interest rate by 0.25%, a move that Fed Chair Jay Powell characterized as a “mid-course correction,” rather than the start of a new cycle of monetary easing. Mr Powell’s description left unsatisfied some investors, who had evidently wanted more aggressive stimulus. For the month the S&P 500 index returned +1.44%, with the gains concentrated among the largest issues. The Mid-cap 400 index returned +1.19%, and the Small-cap 600 index returned +1.14% [Index returns: Standard and Poors]

Despite the softness in Europe, the MSCI Barra EAFE international equity index returned +0.71% in local currencies. The dollar advanced sharply, as trade volumes declined and interest rates in much of Europe fell. A significant quantity of sovereign debt, particularly in Europe, now pays negative rates of interest, adding to the appeal of the dollar, in which interest rates are positive, if modest. The dollar advanced to 108.58 yen from 107.84 a month earlier. It also strengthened to $1.1130 against the euro, compared to $1.1374 at the end of June. And it strengthened to a startling $1.2220 against the pound Sterling, from $1.2704 on June 30, as investors reacted to uncertainty over how Boris Johnson, new UK Prime Minister, will shepherd that nation through its European exit. For US investors, the strength of the US dollar swamped the modest gains in overseas stocks, and EAFE returned –1.27% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

Despite the late move by the Federal Reserve, interest rates crept up during the month, especially at short maturities, resulting in a significant flattening of the yield curve. The two-year US Treasury note ended July at a yield of 1.89%, compared to 1.75% at the end of June. The ten-year yield edged up to 2.02%, from 2.00% a month earlier. The Bloomberg Barclays US Aggregate bond index returned +0.22% for the month [Index return: Bloomberg; Treasury yields: US Treasury]

Financial markets continued to exhibit substantial volatility during June, as market participants remain uncertain as to the direction of the economy, as well as the direction of economically-relevant actions emanating from Washington. The month began with the announcement that the Administration will back off from its threat to impose additional tariffs on goods from Mexico, news that generated a favorable market response. Markets also reacted favorably to a weak jobs report for May. Apparently, many observers believe that such signs of weakness could create an opportunity for the Federal Reserve to reduce interest rates, which many (though not all) suppose would provide a boost to the market. Signals regarding the progress of trade talks with China remain ambiguous, but an apparent thawing in those relations also provided a lift. The G-20 economic summit in Osaka, June 28-29, took place too late in the month to have much effect on the markets. In all, stocks staged an advance that offset the decline they had posted for May; the S&P 500 index returned +7.05% for the month. Smaller stocks also participated in the rally, with the Mid-cap 400 index returning +7.64%, and the Small-cap 600 +7.45% [Index returns: Standard and Poors]

Global markets also advanced, despite uncertainty over the leadership contest in the UK and the shape the UK’s exit from the European Union will take. The MSCI EAFE international equity index returned +4.27% in local currencies. The US dollar weakened, largely due to speculation on the possibility of easing by the Federal Reserve. It fell to 107.84 yen at the end of June, from 108.66 at the end of May. It also weakened to $1.2704 against the pound Sterling, and $1.1374 against the euro, from month-earlier levels of $1.2620 and $1.1149, respectively. The decline gave a boost to US-dollar returns on foreign assets, and EAFE returned +5.93% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

Interest rates continued to fall as signs gathered of possible economic softness and possible Fed easing ahead. The yield on the two-year US Treasury note fell to end June at 1.75%, from 1.95% at the end of May. The ten-year yield ended the month at 2.00%, compared to 2.14% a month earlier. As rates fell, bond prices rose, and the Bloomberg Barclays US Aggregate Bond index returned +1.26% for the month. [Index returns: Bloomberg; Bond yields: US Treasury]

The strength that characterized the US stock market for the first four months of 2019 abruptly ran out at the beginning of May, and the market reversed course, falling sharply throughout the month. The principal change in the economic environment, which seems to have led to the market decline, was an unexpected souring of the tone of trade negotiations between the United States and China. During the course of the month, market participants appear to have internalized the possibility that a trade war may in fact be on the horizon, and that it could lead to a pronounced economic slowdown. Compounding the trade worries was the surprise announcement from the White House near the end of the month, threatening tariffs on goods from Mexico unless that country takes steps to support the US Administration’s immigration policy. The US stock market gave up more than it had gained in April: The S&P 500 index returned -6.35%. Smaller stocks fared even worse; the Mid-cap 400 index returned -7.97%, and the Small-cap 600 index returned -8.73%. [Index returns: Standard and Poors]

Overseas markets continued to mirror the up one month, down the next volatility of the US market. In the UK, the political machinations about that nation’s exit from the European Union ground on, and have now cost Prime Minister Theresa May her leadership post. The MSCI EAFE international equity index returned -4.63% in local currencies. The US dollar rose against European currencies, ending the month at $1.262 against the pound Sterling and $1.1149 against the euro, from $1.303 and $1.1201, respectively, a month earlier. The dollar slipped, though, to 108.66 yen, from 111.40 at the end of April. The net currency effect for US investors was small, and EAFE returned -4.80% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The market weakness and trade tensions brought with them some early indications from the Federal Reserve that they may be re-evaluating the direction of monetary policy, increasing the chance of monetary easing in the coming months. That, along with concerns about possible coming economic softness, drove interest rates sharply lower. The yield on the 2-year US Treasury note fell to 1.95% at the end of May, compared to 2.27% at the end of April. The ten-year yield fell to 2.14%, from 2.51% a month earlier. As a result, the Bloomberg Barclays US Aggregate Bond index returned +1.78% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]

In April the US stock market continued its rebound from the severe downdraft it had suffered in the last part of 2018. Many analysts had expected corporate earnings to contract relative to previous periods, but as earnings reports came in, they showed that those lowered expectations were too pessimistic. Economic data were generally favorable as well. Market participants also expressed optimism for a trade agreement with China. Savvier observers wonder how such a deal, which would govern our bilateral trade with China through direct arm-wrestling with a powerful rival, would be an improvement over the existing multi-lateral system which the US designed and has been leading for nearly three-quarters of a century. Nevertheless, even these observers generally agree that a trade agreement would be preferable to a ruinous trade war. Overall, the S&P 500 index returned +4.05% for the month. Returns were good across market capitalization ranges. The Mid-cap 400 index returned +4.02%, and the Small-cap 600 returned +3.87%. [Index returns: Standard and Poors]

Global equity markets also performed well. One potential problem, the possibility of a disorderly exit by the UK from the European Union, is at least on hold for a time. The MSCI EAFE international equity index returned +3.38% for the month. The US dollar generally strengthened. It ended April at 111.40 yen, up from 110.68 at the end of March. It also strengthened to $1.1201 to the euro, from $1.1228 a month earlier. The dollar ended the month at $1.3030 to the pound Sterling, nearly unchanged from its months-earlier level of $1.3032. Because of the strength of the dollar, EAFE returned only +2.81% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

The Federal Reserve made clear that, in spite of the urging of various White House officials, it has no inclination to add further monetary stimulus to an economy that does not, in its view, need it. The yield curve steepened in response, with short-term interest rates holding steady while longer-term rates rose. The yield on the two-year US Treasury ended April at 2.27%, unchanged from the end of March. The ten-year yield rose, however, ending the month at 2.51%, up from 2.41% a month earlier. The corresponding fall in bond prices, on average, just offset the income from investment-grade bonds, and the Bloomberg Barclays US Aggregate Bond index returned just +0.03% for the month.

US stocks staged a startling recovery in January, recouping nearly all the ground they had given up in December. The reversal was particularly notable because many of the issues that had plagued investors during the final quarter of 2018 continued to trouble them in January 2019. The government shutdown, which had begun in December, dragged on through most of the month, ending with a three-week cease-fire, and finally a continuing resolution to fund government operations. No definitive news emerged concerning trade with China, although negotiators gave vague indications of progress. Federal Reserve officials did strike a more dovish tone during January, but even that change could have been a response to weakening economic conditions. The initial sharpness of the rally may have been due, in part, to the turn of the calendar itself — technical factors like tax-loss harvesting and hedge fund redemptions would have required selling in December, but not in January. The advance continued at a more moderate pace for the remainder of the quarter, although smaller stocks fell back in value during March. The S&P 500 index returned +13.65% for the quarter. Despite declines in March, the Mid-cap 400 index returned +11.61%, and the Small-cap 600 index +13.64%, for the full period. [Index returns: Standard and Poors]

The rally also extended to overseas stocks, in spite of signs of slowing in a number of economies around the world and uncertainty over the path of the UK’s exit from the European Union and the political fate of UK Prime Minister Theresa May. The MSCI EAFE international equity index returned +10.59% in local currencies. The US dollar was mixed against other currencies. It advanced to 110.68 yen from 109.70 at the end of December, and it strengthened to $1.1228 against the euro, compared to $1.1456 on December 31. It weakened, however, to $1.3032 against the pound Sterling, compared to $1.2763. EAFE returned +9.98% in US dollars for the quarter. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

Interest rates fell sharply, particularly in March, as the Fed continued to signal its accommodative stance. The two-year Treasury yield ended the quarter at 2.27%, down from 2.48% at the end of December. The ten-year yield also fell, ending March at 2.41%, from 2.69% three months earlier. The Bloomberg Barclays US Aggregate Bond Index returned +2.94% for the quarter. [Index return: Bloomberg; Bond yields: US Treasury]

The positive market momentum that began in January continued through March, at least with respect to the largest US stocks. On the positive side, negotiators conducting trade talks with China signaled some degree of progress, although their statements were short on specifics. The Federal Reserve also reinforced their indications of a shift toward a more accommodative monetary policy stance, although the White House complained that they have not been accommodative enough. Other problems persist, however. Global economic growth appears to be slowing, and the UK Government appears unable to forge any consensus in Parliament regarding the terms of that country’s exit from the European Union. Through it all large US stocks performed well. The S&P 500 index returned +1.94% for the month. The market’s advance was quite narrow, however: The Mid-cap 400 index lost –0.57%, and the Small-cap 600 lost –3.33%. [Index returns: Standard and Poors]

Despite global economic uncertainty, international stocks advanced. The MSCI EAFE international equity index returned +1.34% in local currencies. With soft economic performance and uncertainty in Europe, the US dollar advanced against European currencies. The dollar ended March at $1.1228 to the euro and $1.3032 to the pound Sterling, compared to levels of $1.1379 and $1.3274, respectively, a month earlier. The dollar slipped to 110.68 yen, from 111.38 at the end of February. With the currency movement, EAFE returned +0.63% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

In keeping with the Fed’s accommodative policy, interest rates fell sharply during March. The two-year US Treasury note yielded 2.27% at the end of the month, down from 2.52% a month earlier. The ten-year yield ended March at 2.41%, down from 2.73% at the end of February. Accordingly, bonds rallied sharply — the Bloomberg Barclays US Aggregate Bond index returned +1.92% for the month. [Index returns: Bloomberg; bond yields: US Treasury]

The remarkable rebound that began in the US stock market during January continued, although at a more moderate pace, in February. The upward momentum persisted in spite of continued uncertainty regarding US trade policy, arms control negotiations with North Korea, and the consequences of the UK’s movement toward leaving the European Union. Other cautionary signs include indications of a general slowing in global economic growth, most notably in Germany. Perhaps helping the market, though, were a series of comments by Federal Reserve officials, including Fed Chair Jerome Powell, suggesting that the Fed may be on the verge of adopting a more accommodative monetary policy. The S&P 500 index returned +3.21% for the month. Smaller stocks performed better still. The Mid-cap 400 index returned +4.24%, and the Small-cap 600 index returned +4.35%. [Index returns: Standard and Poors]

Global stocks also performed well in February. The MSCI EAFE international equity index returned +3.47% in local currencies. The US dollar strengthened to 111.38 yen from 108.84 at the end of January, and to $1.1379 against the euro from $1.1454 a month earlier. The dollar eased a bit against the pound Sterling, to $1.3274 at the end of February, compared to $1.3135 at the end of January. The currency movement worked against US investors, and EAFE returned +2.55% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]

In spite of the Fed’s rather dovish signals, interest rates drifted a bit higher during February. The two-year US Treasury note yielded 2.52% at the end of February, up from 2.45% a month earlier. The ten-year yield also rose – to 2.73%, from 2.63% at the end of January. Market-wide, the rise in rates offset the coupon income from bonds, and the Bloomberg Barclays US Aggregate Bond index returned -0.06% for the month. [Index returns: Bloomberg; US Treasury yields: US Treasury]

US stocks staged a startling recovery in January, recouping nearly all the ground they had given up in December. The reversal was particularly notable because many of the issues that had plagued investors during the final quarter of 2018 continued to trouble them in January 2019. The government shutdown, which had begun in December, dragged on through most of the month, and the compromise that ended it merely amounted to a three-week cease-fire. No definitive news emerged concerning trade with China. Federal Reserve officials did strike a more dovish tone during January, but even that change could have been a response to weakening economic conditions. The sharpness of the rally may have been due, in part, to the turn of the calendar itself — technical factors like tax-loss harvesting and hedge fund redemptions would have required selling in December, but not in January. In any event, the S&P 500 returned a stunning +8.01% for the month. Smaller stocks performed even better: the Mid-cap 400 index returned +10.46%, and the Small-cap 600 index rose +10.64%. [Index returns: Standard and Poors]

January’s rally extended overseas as well, in spite of signs of slowing in a number of economies around the world and uncertainty over the path of the UK’s exit from the European Union and the political fate of UK Prime Minister Theresa May. The MSCI EAFE international equity index returned +5.46% in local currencies for the month. Possibly because of dovish rhetoric on the part of the Fed, the US dollar weakened a bit. It ended January at 108.84 yen, down from 109.7 a month earlier. It also slipped to $1.3135 against the pound Sterling, from $1.2763 at the end of December. The dollar was steady against the euro, ending little changed at $1.1454 against that currency. The dollar’s softness benefited US investors already holding overseas assets, and EAFE returned +6.57% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]

The Fed’s more accommodative statements pushed interest rates a little lower. The yield on the two-year US Treasury fell to 2.45%, from 2.48% at the end of December. The ten-year yield ended January at 2.63%, from 2.69% a month earlier. As a result, the Bloomberg Barclays US Aggregate Bond Index returned +1.06% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]