PMC Weekly Review – April 8, 2019

A Macro View – March Monthly Recap

Domestic equity markets continued to post positive returns for March, although at reduced rates when compared with performance for January and February. All three months combined to give domestic markets a notable opening quarter for the year. In fact, it was the best-performing first quarter since 1998 and strongest individual quarter in the past nine-and-a-half years. Markets rallied on the back of continued dovish sentiment from the Federal Reserve Bank (the Fed) and new rounds of trade talks with China, as US negotiators head to Beijing, hoping to strike a deal sometime next month. The Federal open Market Committee (FOMC) decided at its March meeting to leave the target federal funds rate unchanged, stating that current rates are neutral, neither helping nor hurting the economy. The Fed further forecast no additional rates hikes for the rest of the year, and stated that it would stop shrinking its balance sheet in September. This was a remarkable course change, given that just three months ago the Fed was signaling several rate hikes in 2019 and continued balance sheet reduction. Although the new dovish tone from the Fed has many market participants enthralled by the continued market rally, some find themselves asking, What is the Fed worried about?

For the month of March, the S&P 500 Index returned 1.90% and the DJIA posted a 0.20% gain, ending the first quarter with returns of 13.70% and 11.80%, respectively. Within domestic stocks, small cap diverged from large cap, ending the month in negative territory, as the Russell 2000 Index trailed the Russell 1000 Index’s return of 1.70% by 380 basis points. Mid cap stocks outperformed small caps, with the Russell Mid Cap Index gaining 0.90%. Growth stocks outperformed value stocks for the fourth month in a row, with the Russell 3000 Growth Index returning 2.50% compared with 0.40% for the Russell 3000 Value Index. Sector performance was mostly positive, with the Information Technology and Real Estate sectors generating the best results, returning 4.80% and 4.90%, respectively, whereas Financials and Industrials struggled the most, returning -2.60% and -1.10% on a respective basis. All sectors posted positive performance for the quarter, with Real Estate on the high end, returning 19.90%, and Health Care on the low end, retuning 6.60%. The Bloomberg Commodity Index declined 0.20% in March, but ended the first quarter up 6.30%, its highest quarterly return in nearly three years.

International equity markets continued to underperform relative to their domestic counterparts, as the MSCI ACWI ex-U.S. Index returned 0.60% in March and 10.30% for the first quarter. As with many other markets, global equity, as measured by the MSCI ACWI, posted its strongest individual return since the third quarter of 2010. The higher correlation between domestic and international equity remained in place over the month, as the European Central Bank (ECB) announced that there would be no interest rate increases for the remainder of 2019. The announcement was met with sharp criticism from the eurozone’s financial sector, raising a concern about the side effects from prolonged negative interest rates. The ECB reduced its forecast for 2019 gross domestic product (GDP) to 1.10% from 1.70% as Italy’s economy contracted. ECB President Mario Draghi blamed the economic weakness on “…uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.” Despite the risks, international developed equities and emerging markets equities delivered positive performance for both the month and quarter, with the MSCI EAFE Index up 0.60% and 10.00%, respectively, and the MSCI EM Index up 0.80% and 9.90% on a respective basis.

Fixed income markets posted positive returns across the asset class, as yields declined during March. The yield curve flattened over the month and actually inverted for a few trading days as the yield on the 10-Year U.S. Treasury Note fell to 2.39%, while the yield on the 3-Month Treasury Note remained steady at 2.44%.The Fed reduced its 2019 GDP forecast to 2.10%, down from its previous forecast of 2.30%, citing slower growth of household spending and business fixed investment in the first quarter. Labor markets remain steady, with continued job gains and unemployment at 3.80%.
The Bloomberg Barclays U.S. Aggregate Bond Index and US government securities rose 1.50% and 1.30%, respectively, as longer-maturity bonds outperformed shorter ones. Investment grade corporates posted strong performance, ending the month up 2.50%. Global bonds trailed their domestic fixed income counterparts, as the Barclays Global Aggregate ex-U.S. Index returned 1.30%. High yield and emerging markets debt experienced some relative weakness, returning .90% and 0.20%, respectively, in March. Municipal bonds posted positive returns, but trailed their taxable counterparts, with the Bloomberg Barclays Municipal Index returning 1.60% for the month. Within the municipal space, the longer-term securities posted better returns, with the 22+ Year Index beating the 1-2 Year Index by 234 basis points.

Scott Keller
Portfolio Manager

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