U.S. equities climbed for the ninth straight week – the longest such period since 1995 – and the CBOE Volatility Index (VIX), a measure of market volatility, continued to fall over the same period, closing at 13.51, down 9.4%.
Cyclical stocks, those thought to be most directly tied to the U.S. economy, continued to lead the way, including industrials, financials and energy. Progress in the U.S. – China trade talks was one big reason for the optimism with President Trump tweeting on Sunday night that he was willing to extend the deadline for bumping up tariffs on Chinese goods past March 1. The Fed, for its part, appears to be continuing its dovish stance with talk about “inflation targeting.” More light may be shed this week when Chairman Powell testifies before Congress.
Emerging market and international stocks had a good week, too, as a potential for reduced trade friction is seen as good all around. Most European indexes were up modestly, with basic resources – companies with exposure to China – up strongly. More generally, economic data was mixed as Germany’s business climate index slipped again. On the plus side, the IHS flash composite PMI rose to 51.4 in February, up from 51.0 the prior month. Brexit continued to loom with the March 29 deadline moving ever closer. In Asia, the Shanghai Composite ended the week on an up note and appeared poised for further gains.
On the earnings front, U.S. companies have generally done well relative to expectations. Earnings growth has slowed and faces more headwinds in the year as the impact of tax reform declines. A slowdown in the broad economy, widely predicted, will likely not help either. On a more positive note, about six out of ten companies reported stronger-than-expected revenue in 4Q, slightly better than the 5-year average, according to The Wall Street Journal.
GAIN: Active Asset Allocation
Small cap stocks, emerging market equities, and other high beta asset classes had a good week, again supported by the positive signs coming out of the U.S. – China trade talks. U.S. small cap was up just under one percent, while the MSCI EAFE climbed 1.65% on the week in dollar terms.
Trading volume for the month has been light compared to January, suggesting that many investors continue to watch from the sidelines. Breadth, however, has strengthened unlike the previous five years when the largest market cap stocks were the best performers. We view that as a positive sign.
One indicator that bears watching: asset class correlations have been high, suggesting more indiscriminate buying on the part of investors who may be chasing the rally.
PROTECT: Risk Assist
Volatility expectations moved lower still on the week, with the VIX closing at 13.5 on Friday, its first sub-14 close since October 3rd of last year. Volatility expectations for foreign exchange (FX), interest rates, and commodities have also declined, generally a positive sign.
Still, we live in a volatile world and there are multiple events that are worth monitoring, any one of which could cause this trend to reverse. The known “crises” are by now all too familiar – Brexit and U.S.-China trade – and have perhaps been discounted by the market. But they are joined by others that are just now coming into view, a potential recession in Italy, for example.
SPEND: Real Spend
Bonds have continued to outperform stocks on a trailing one-year basis, but the margin is shrinking. Global equities are now up 11% on the year compared to 1.1% for investment-grade bonds. Over the past 12 months stocks are down -0.5% while bonds are up 3.8%.
Yields on the 10-year Treasury were up slightly on the week, ending at 2.682%. Domestic dividend stocks did well while MLPs declined, in spite of the rising price of oil. Convertible bonds and senior loans were up nearly one percent. The ICE BoAML U.S. High Yield Index was up 0.35% on the week.
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