Market Commentary: Q1 2019

Axis Advisors LLC |

The fourth quarter of 2018 saw financial markets experience higher levels of volatility, with large market swings driven in part by geopolitical issues, in part by the ending of quantitative easing by central banks.  While many of these issues remain unresolved, Q1 of 2019 has seen global markets enjoy a strong recovery from the turmoil. 

The recent government shutdown has resulted in delays in publishing many economic data series, making gauging current economic conditions more difficult.  However, the latest Manufacturing ISM® Report suggests that the overall economy grew for the 118th consecutive month economic activity through February.[1]  Nonfarm payrolls increased by 20,000 jobs in February, well below expectations of over 180,000. The unemployment rate fell to 3.8%, resuming its steady decline after the recent government shutdown. [2]

U.S. Trade deficit of $891b for 2018 was an all-time record. However, when making historical comparisons, 2018’s deficit of 4.3% of Gross Domestic Product (GDP) was below 2006’s 6.1% of GDP, and in unadjusted dollar terms smaller than the overall trade deficit (that is including services as well as goods) of 2005 & 2006. [3]

Domestic, International Developed and Emerging Markets equities all had healthy rebounds quarter-to-date, posting positive returns. [4]

Fixed income indices have also posted positive results for the year, as of the writing of this commentary on March 14th.[5]

Global factor performance continues to be a mixed bag, demonstrating the importance of factor diversification. In the U.S. markets, Quality and Small Cap exposure have provided positive performance quarter-to-date, while Value, Momentum, and Min Vol have struggled to keep pace. Internationally, Momentum, Quality, and Small Cap are positive contributors, while Value and Min Vol have lagged.[6]

The Federal Reserve maintained its target range for the federal funds rate at 2.25%-2.50% at its January meeting. In what has been viewed as a significant policy U-turn, Federal Reserve Chairman Jay Powell struck a decidedly dovish tone in the statement and press conference, shelving any plans to lift rates further because of possible risks to U.S. growth.  This move was soon followed by other central banks, as Australia, India and the U.K. all joined in the retreat from plans to tighten monetary policy.[7]

 

With the pull back in tightening by the Fed and other central banks, uncertainty around Brexit looms large as a potential source of volatility in equity and fixed income markets in the short term.

Financial markets have been pricing for the uncertainty by demanding higher funding costs for insurers and banks, lower valuations for stocks and higher interest rates for junk-bond issuers.  While this would appear on the face of it to be a European phenomenon, U.S. companies are not immune, as those companies who have borrowed in sterling are grappling with a current dollar/pound arbitrage that shouldn’t exist.[8]

Amidst the ever-changing geopolitical landscape and potential return of volatility to global markets, Symmetry Partners believes investors are best served to stay focused on the long-term investment goals that prompted them to put capital to work in the markets to begin with, else they risk making decisions based solely on recent or short-term market movements. While the discipline this requires can be difficult during periods of market volatility, we see from the data that there are strong benefits to taking a path of broadly diversified exposures over time, and “staying the course” to fully realize those benefits.

 

[1] February 2019 Manufacturing ISM Report On Business

[2] JP Morgan Weekly Economic Update Mar 11, 2019

[3] Fox, Justin. “Trump is Actually Making the Trade Deficit Bigger.” Bloomberg, March 14, 2019

[4] Morningstar Direct, as of Mar 14, 2019.

[5] Morningstar Direct, as of Mar 14, 2019.

[6] Morningstar Direct, as of Mar 14, 2019.

[7] Flemming, Sam. “Global Economy: Why Central Bankers Blinked.” Financial Times, Feb 8, 2019

[8] Wallace, Joe. “Tracking Brexit’s Ripples.” The Wall Street Journal, March 13, 2019