Investment Commentary: February 2019

  • February 12, 2019

Equity markets around the world rallied in January following a December that was one of the worst on record. U.S. stocks gained 8% in January—the S&P 500’s best start to a year in 32 years.

Markets shrugged off a five-week partial U.S. government shutdown that started over the holidays and lasted well into January. So now that it is over, we have clipped about a half a percent off 1st quarter’s GDP growth. However, the Congressional Budget Office (CBO) estimates that the majority should be recouped in subsequent quarters. Focusing on the future, the U.S. now still has one other big item on the ‘Open for Business’ agenda and that is to end the tariff and trade threats and let the goods start flowing across the borders again.

Turning to foreign equities, the MSCI ACWI ex USA index jumped 7.6%—its best start in 25 years. Emerging-market stocks built on their year end momentum and dollar weakness to gain 8.8% for the month. Developed international stocks also had strong returns posting a 6.6% gain. Continued uncertainty around Brexit remains in the headlines. The U.K. Parliament voted overwhelmingly against Prime Minister Theresa May’s Brexit deal in mid-January, which had taken two years to get agreement done. The United Kingdom has until March 29 to come to a deal with the European Union on the terms of its departure, or to kick the can further down the road.

U.S. core investment-grade bonds gained 0.9% during January. U.S. high-yield and emerging market debt markets performed even better—gaining 4.5% and 4.4% respectively. Treasury rates were largely unchanged in the month: the short-end of the yield curve hovered around 2.4% and the longer 10-year rate stayed in the mid-2.6% range.

At the end of the month, Fed chair Jerome Powell delivered what the market deemed to be a dovish stance on interest rates. The FOMC left the federal funds rate unchanged at 2.25%–2.5%. In his news conference, Powell was quoted as saying the “case for raising rates has weakened somewhat,” and also indicated the shrinkage of the Fed’s balance sheet (quantitative tightening) may slow, pause, or even reverse. The FOMC statement said: “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.” This is a fairly clear indication that the Fed’s declaration that they will be “patient” before making its next policy move was driven in part by the market turmoil in the fourth quarter —the Powell Put is in place, for now.

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