Error message

Warning: implode(): Invalid arguments passed in envestnetpmc_mod_views_pre_view() (line 65 of /mnt/www/html/envestnetpmc/docroot/sites/all/modules/custom/envestnetpmc_mod/envestnetpmc_mod.module).


PMC Weekly Review – May 13, 2019

A Macro View – April Monthly Recap
The rally in the domestic equity markets, which looked to be losing momentum in March, returned with a vengeance in April. An upside surprise in first quarter gross domestic product (GDP) and a stronger-than-expected first half of corporate earnings season were the primary drivers, boosting stocks across the board. The government shutdown in the early part of the first quarter had reduced expectations for GDP growth to around 2.50%, but the first estimate was significantly stronger at 3.20%. Meanwhile, following a difficult fourth quarter, earnings expectations were revised downward for the first part of 2019, only to have these muted expectations exceeded by a wide range of companies as reports rolled in across the month of April. Banks were the big winners of earnings season, and Financials rallied to lead S&P 500 Index sectors for the month. Mega cap tech stocks continued their winning streak, while the overall economic optimism resonated through economically sensitive sectors such as industrials. 

Growth continued to outpace value in the large and midcap markets in April. The Russell 1000 Growth Index was up 4.50% in December, outpacing the 1000 Value Index by nearly 1.00%. The midcap markets were the best performers for the month, as the Russell Midcap Growth Index rose 5.50% vs. a 3.30% return for the value- oriented version of the index. Somewhat counter-intuitively, small cap stocks were the laggards in April and the only space where value outperformed growth. The Russell 2000 Value Index was up 3.80%, roughly 75 basis points ahead of the growth index. This performance was driven largely by the growth index’s significant weight in the Health Care sector, the only sector with negative performance, due in part to universal health care as a hot issue in the Democratic primaries. The value index’s largest single sector, on the other hand, is Financials, which showed strong leadership in April. 

The international equity markets  rose slightly during April but lagged their US counterparts. The EAFE Index was up 2.80%, and similar to the domestic markets, growth outperformed value. Brexit negotiations continued during the month, ultimately being pushed back to October to allow for more time to negotiate the UK’s exit from the European Union (EU). The European  Central Bank (ECB) cut its 2019 EU growth forecast to 1.20% from an already modest 1.30%, as substantial downside risks to the growth outlook remain. Despite the gloomy economic outlook and political threats to the EU, stocks in Europe rose 3.60%, outpacing the remainder of the developed markets. Primary factors included a strong start to the first quarter’s earnings season in the region and the increase in sentiment around Europe’s second-largest trading partner, China, whose stimulus package began to have a positive impact on Chinese growth.

Stocks in emerging markets countries, up 2.10%, trailed their developed markets counterparts. Results in China were modestly positive, rising 2.20%, as markets priced in positive developments in trade negotiations with the US. However, some economic activity showed signs of flagging. The purchasing manager’s index weakened from 50.5 in March to 50.1 in April, and exports from China fell 2.70% in the month compared with one year earlier. It appears China is feeling the pinch of a slowing global economy. Latin America as a region was marginally positive at 0.40%, despite a 7.90% loss in Argentina for the month.

The domestic fixed income markets  were largely flat in April, with the US Government/Credit Index returning five basis points and the Aggregate Index up just three basis points. Although credit posted relatively strong returns of 49 basis points, mortgage-backed securities, down six basis points, and Treasurys, declining 28 basis points, both experienced negative price pressure, as the yield curve steepened on modestly higher growth expectations for the global economy. Credit spreads were largely unchanged in the investment grade space, just two basis points tighter than at the end of March. The high yield market continued its rally from the first quarter, rising 1.40%, as spreads compressed by roughly 30 basis points on average in April. The bank loan market was even stronger with the S&P Performing Loan Index up 1.80%. 

The municipal market was similarly quiet with the 1-5 Year Index up just two basis points and the 1-15 Year Index up 20 basis points. Technicals in the municipal market remained strong, as new supply is down 28% this year compared with the first four months of 2018. Demand for tax-free funds in April continued at a near record pace, as municipal bond funds as a whole took in more than $6 billion after taking in $27 billion in the first quarter. However, short-term municipal bond funds had outflows of slightly more than $1 billion, as investors pulled out money to pay their annual tax bills. This pushed short-term yields slightly higher, while intermediate and longer term yields fell in conjunction with the taxable market. These technicals are expected to continue to drive the market for the next few months, as cash from maturities and early calls this summer, the vast majority of which will need to be reinvested, are estimated to significantly exceed the amount of new supply. 

Sovereign credits in developed markets were down roughly 80 basis points in dollar terms in April, as bond yields rose across much of Europe and Asia, reflecting improving market sentiment. The yield on the 10-year German Bund rose eight basis points, returning to positive territory with a yield of 0.01%. Central bankers remain cautious, even with this modest rise in rates. ECB President Mario Draghi continued to indicate that rate hikes are unlikely through the remainder of 2019, and the ECB stands ready to use appropriate tools to move inflation closer to its 2.00% target. Bank of Japan Governor Haruhiko Kuroda indicated that rates would not be raised before the spring of 2020, introducing a time frame to its “extended period” comments for the first time. Kuroda also continued to express concerns over slowing growth and weak developments in inflation.

Nathan W. Behan, CFA, CAIA
Senior Vice President, Investment Research

Download the full PDF


The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this weekly review is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Past performance is not indicative of future results.

Information obtained from third party sources are believed to be reliable but not guaranteed. Envestnet|PMC™ makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.

Investments in smaller companies carry greater risk than is customarily associated with larger companies for various reasons such as volatility of earnings and prospects, higher failure rates, and limited markets, product lines or financial resources. Investing overseas involves special risks, including the volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. Income (bond) securities are subject to interest rate risk, which is the risk that debt securities in a portfolio will decline in value because of increases in market interest rates. Exchange Traded Funds (ETFs) are subject to risks similar to those of stocks, such as market risk. Investing in ETFs may bear indirect fees and expenses charged by ETFs in addition to its direct fees and expenses, as well as indirectly bearing the principal risks of those ETFs. ETFs may trade at a discount to their net asset value and are subject to the market fluctuations of their underlying investments. Investing in commodities can be volatile and can suffer from periods of prolonged decline in value and may not be suitable for all investors. Index Performance is presented for illustrative purposes only and does not represent the performance of any specific investment product or portfolio. An investment cannot be made directly into an index.

Alternative Investments may have complex terms and features that are not easily understood and are not suitable for all investors. You should conduct your own due diligence to ensure you understand the features of the product before investing. Alternative investment strategies may employ a variety of hedging techniques and non-traditional instruments such as inverse and leveraged products. Certain hedging techniques include matched combinations that neutralize or offset individual risks such as merger arbitrage, long/short equity, convertible bond arbitrage and fixed-income arbitrage. Leveraged products are those that employ financial derivatives and debt to try to achieve a multiple (for example two or three times) of the return or inverse return of a stated index or benchmark over the course of a single day. Inverse products utilize short selling, derivatives trading, and other leveraged investment techniques, such as futures trading to achieve their objectives, mainly to track the inverse of their benchmarks. As with all investments, there is no assurance that any investment strategies will achieve their objectives or protect against losses.

Neither Envestnet, Envestnet|PMC™ nor its representatives render tax, accounting or legal advice. Any tax statements contained herein are not intended or written to be used, and cannot be used, for the purpose of avoiding U.S. federal, state, or local tax penalties. Taxpayers should always seek advice based on their own particular circumstances from an independent tax advisor.

© 2019 Envestnet. All rights reserved.