PMC Weekly Review - April 06, 2018

A Macro View: “March Monthly Recap"

Domestic equity markets rallied in the first half of March, but ended the month with heightened volatility, with the major equity indices falling to February’s lows. The first quarter ended in negative territory, as stocks faced downward pressure amid concerns over rising inflation, stretched valuations as we marked the ninth anniversary of the current bull market, and protectionist measures from the Trump Administration combined with a looming trade war with China. For the quarter, the S&P 500 and Dow Jones Industrial Average (DJIA) were down 0.76% and 1.96%, respectively, as February and March selloffs erased all of this year’s earlier gains. Despite the recent pullback and return to volatility, many market participants, citing solid fundamentals, remain optimistic about the near-term prospects. Recent economic reports show strong outcomes from the US economy, with the labor market continuing to strengthen, job gains showing strong growth in recent months, and the unemployment rate remaining low. Additionally, economic activity has been rising at a moderate rate, given the solid growth rates of household spending and business fixed investment.

For the month, the S&P 500 and DJIA returned -2.54% and-3.59%, respectively. Small cap stocks outperformed large cap equities, as the Russell 2000 Index posted a return of 1.29% compared with the Russell 1000’s loss of 2.27%. Mid cap stocks trailed small cap as well, with the Russell Mid Cap Index gaining 0.06%. Value stocks outperformed growth stocks, which is a break in trend from growth’s dominance over value in the past few quarters, with the Russell 3000 Value Index returning −1.54% compared with - 2.44% for the Russell 300 Growth Index. Sector performance was mostly negative, with positive returns from only three sectors. Utilities and Real Estate were the strongest performers, returning 3.76% and 3.78%, respectively, whereas Financials was the largest straggler, posting a loss of 4.31%, followed by Materials, with a loss of 4.24%. Year to date, the Information Technology and Consumer Discretionary sectors are the only sectors in positive territory, at 3.53% and 3.09%, respectively. The Bloomberg Commodity Index was down for both the month and quarter, returning -0.62% and -0.40%, respectively, but has outpaced many of the more traditional equity and fixed income asset classes.

International equity markets generated better results when compared with their domestic large cap counterparts, with the MSCI ACWI ex-U.S. Index returning -1.76% for the month of March. Eurozone economic growth remains solid, and the European Central Bank expects the economy to expand in the near term at a faster pace than was previously expected, forecasting real GDP to hit 2.4% in 2018. Both international developed and emerging markets equities experienced a pullback for the month, with the MSCI EAFE Index and MSCI EM Index posting losses of 1.80% and 1.86%, respectively. Regionally, Europe was a top international performer from a relative standpoint, declining only 1.20%, whereas the Pacific region ex Japan was down 4.16%. The MSCI China index was down 3.29% in March but still was able to log a 1.82% gain for the quarter. Within emerging markets, EM Latin America continued to be a strong performer, losing only 0.96%, but maintaining a sizable advantage over its peers year to date, with an 8.02% gain in Q1.

Fixed income markets posted mostly positive returns for the month, as longer-term yields trended lower. The first rate increases for 2018 were implemented in March, as the Federal Open Market Committee (FOMC) voted to hike the fed funds rate 25 basis points to a range of 1.50% to 1.75%. Despite this increase, the yield on the 10-Year Treasury Note decreased, ending the month at 2.74%. This resulted in a flatter US Treasury curve at month’s end, as the yield on the longer 20- and 30-year bonds fell 17 and 16 basis points, respectively, whereas at the shorter end of the curve, the yield on the three- and six-month Treasury notes rose eight and seven basis points, respectively. This rate hike was the first of three or four increases that the FOMC, under new Federal Reserve (Fed) Chairman Jerome Powell, is expected to make in 2018, as the Fed continues to normalize rates in response to favorable economic activity. The Bloomberg Barclays U.S. Aggregate Bond Index increased by 0.64% for the month, but was down 1.46% for the quarter. Global bonds continued to outperform domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index returned 1.43% and 3.62% for the month and quarter, respectively. Similar to their taxable bond peers, municipal bonds posted mostly positive returns, with the Bloomberg Barclays Municipal index returning 0.37% for the month. Within the municipal space, longer-term securities fared better, with the Bloomberg Barclays Municipal Long 22+ Year Index outpacing the Bloomberg Barclays Municipal 1-3 Year Index by 64 basis points. Both the US Corporate Investment Grade Index (up 0.25%) and the US Government Index (up 0.93%) outperformed high yield fixed income, which returned -0.60% for the month.

Scott Keller
Associate Portfolio Manager

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