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Market Update for the Month Ending February 28, 2019

Another strong month for markets

February was a sweet month for investors. The Dow Jones Industrial Average led with a return of 4.03 percent. The S&P 500 and Nasdaq Composite returned 3.21 percent and 3.60 percent, respectively. All three indices have returned double digits to start 2019.

Improving fundamentals supported performance. According to FactSet, the blended earnings growth rate for the S&P 500 is 13.1 percent. Technicals were also supportive, with all three indices ending the month above their 200-day moving averages.

The international story was similar. The MSCI EAFE Index gained 2.55 percent, and the MSCI Emerging Markets Index returned 0.23 percent. Developed markets were supported by a potential Brexit delay, but a global trade slowdown weighed on emerging markets.

The MSCI EAFE Index remained below its 200-day moving average for the ninth month in a row. Emerging markets broke above their trend line and ended the month in positive territory. 

Fixed income had a difficult month. The Bloomberg Barclays U.S. Aggregate Bond Index fell 0.06 percent, on an increase in rates. The 10-year U.S. Treasury opened the month at 2.70 percent and ended at 2.73 percent. High-yield fared better, returning 1.66 percent.

Risks diminished as economic news trickled in

Diminished risks helped drive market performance. We avoided a second government shutdown and saw progress on trade negotiations with China. Across the pond, British Prime Minister May announced Parliament could vote to delay Brexit. This may avoid the no-deal Brexit, which would throw the U.K. economy into chaos.

Economic picture messy and incomplete

The government shutdown delayed many economic reports. But the data we have shows an economy that stumbled in December and rebounded to start the year.

This picture can be seen in consumer confidence. The Conference Board’s consumer confidence survey declined in December and January before rebounding in February (see Figure 1). This rebound was driven by the end of the government shutdown and strong market performance. A surge of 304,000 new jobs in January also helped. 

Figure 1. Conference Board Consumer Confidence Survey, 2014–Present

Consumer spending also declined in December, with the largest one-month drop in retail sales since September 2009. But the personal savings rate was the highest it has been in nearly three years. So, consumers have money to spend. With the rise in confidence, they may be more willing to spend it.

The first estimate of fourth-quarter gross domestic product growth is 2.6 percent, annualized. This is down from 3.4 percent in the third quarter, although it represents a solid end to the year. If consumer spending rises and businesses remain confident, we could see increased economic growth.

Keep an eye on the risks

The housing market remains a concern. Year-over-year existing home sales have fallen for each of the past 11 months. Plus, homebuilder confidence increased slightly in February but is below levels seen a year ago. Housing is a major sector of the economy and provides knock-on effects for other industries. So, this slowdown is concerning. 

Internationally, Brexit negotiations and trade talks with China have been center stage. There has been headway, but this is no guarantee that these risks will not affect markets.

New risks could also arise. For example, hostilities between nuclear powers India and Pakistan have flared up. There have been positive developments, including Pakistan’s offer to return a captured Indian pilot. Nonetheless, this situation bears watching.

U.S. economy and outlook remain robust

The outlook for the economy and markets remains healthy. Corporations continue to post strong earnings growth. Plus, markets appear to have weathered December’s volatility. Maintaining high confidence levels for businesses and consumers remains important. We will need additional spending to grow the economy at a similar pace to last year.

Things look good for U.S. investors. Some risks remain, but the markets’ rebound from the recent volatility showcases the importance of building a well-diversified portfolio that matches your risk tolerance to your financial goals.

 

All information according to Bloomberg, unless stated otherwise.  

 

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

 

Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, fixed income analyst, at Commonwealth Financial Network®.

 

© 2019 Commonwealth Financial Network®