The US equity market fell sharply during the fourth quarter. The slide began early in October, likely reflecting a realization of the scale of the political risk affecting economic prospects for the coming months. Commentaries in a number of corporate reports cited worries over tariffs. Some market participants also became concerned that last year’s fiscal stimulus may prove short-lived, and the resulting fiscal deficit could become a problem, perhaps leading to recession, in the medium term. Markets rallied sharply after the mid-term elections, but the slide resumed, and gathered momentum, during December. The government shutdown, brought about by surprise by intransigence from the Oval Office over the issue of a wall on the southern border of the US; an ill-timed statement from Treasury Secretary Mnuchin, which he intended as a reassurance to the markets regarding liquidity in the banking system, but which instead drew attention to the matter as an unexpected area of additional concern; and ongoing concerns over US trade relations, all contributed to the downward pressure. Some market participants had expressed hopes that the Federal Reserve might provide relief by slowing its program of tightening monetary conditions, but the Fed, as expected, raised its short-term interest rate target, perhaps adding to the market’s woes. The S&P 500 index returned –13.52% for the quarter, leaving it with a return of –4.38% for the full year. [Index returns: Standard and Poors]
International equities also fell, as fears gathered concerning both a possible global economic slowdown and the ultimate upshot of the UK’s exit from the European Union. The MSCI EAFE international equity index returned –12.20% in local currencies. The US dollar strengthened to $1.1456 against euro and $1.2763 against the pound Sterling, from September 30 levels of $1.1622 and $1.3053, respectively. The dollar fell to 109.70 yen (from 113.48 at the end of September), however, as that currency appeared to attract safe-haven interest toward the end of December. EAFE returned –12.54% in US dollars for the quarter; –13.79% for the year. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]
Despite the Fed’s monetary tightening, interest rates fell sharply as investors sought safety in US Treasury securities. The two-year Treasury yield ended the year at 2.48%, down from 2.81% at the end of September. The ten-year yield also fell, ending December at 2.69%, from 3.05% three months earlier. The Bloomberg Barclays US Aggregate Bond Index returned +1.64% for the quarter, and +0.01% for the year. [Index return: Bloomberg; Bond yields: US Treasury]
The market downdraft, which began in October and then seemed to abate in November, returned with renewed intensity for most of December. A number of the worries that had deranged markets in October seemed increasingly likely to take more tangible form. The combination of the government shutdown, brought about by surprise by intransigence from the Oval Office over the issue of a wall on the southern border of the US; an ill-timed statement from Treasury Secretary Mnuchin, which he intended as a reassurance to the markets regarding liquidity in the banking system, but which instead drew attention to the matter as an unexpected area of additional concern; and ongoing concerns over US trade relations, particularly with China, all contributed to the downward pressure. Some market participants had expressed hopes that the Federal Reserve might provide relief by slowing its program of tightening monetary conditions, but the Fed, as expected, raised its short-term interest rate target, perhaps adding to the market’s woes. Year-end technical factors, including hedge fund redemptions and tax-loss selling by taxable investors, may also have played a role, but the downdraft was unusually severe, producing the worst December market (according to some) since the Great Depression. The S&P 500 index returned -9.03% for the month. Smaller stocks fared even worse: the Mid-cap 400 index returned -11.32%, and the Small cap 600 index returned -12.07%. The losses more than wiped out gains from the first eleven months of the year; the S%P 500 returned -4.38% for all of 2018. [Index returns: Standard and Poors]
As often happens, the selling was a global affair, although overseas markets were not quite so weak as those in the US. Global investors continue to worry about the ultimate upshot of the UK’s exit from the European Union. The MSCI EAFE international equity index returned -5.85% in local currencies. The US dollar weakened, particularly against the Japanese yen, which appeared to attract interest as a possible safe have for global investors. The dollar fell to 109.70 yen, from 113.54 a month earlier. It also eased to $1.1456 against the euro, from $1.1323 at the end of November. The dollar ended the year at $1.2763 against the pound Sterling, near the level of $1.2772 at which it stood at the end of the previous month. EAFE returned -4.85% in US dollars. [Index returns: MSCI; Exchange rates: Federal Reserve H.10 release]
Despite the Federal Reserve’s move to tighten monetary conditions, interest rates fell sharply as investors sought safety in US Treasury securities. The two-year Treasury yield ended the year at 2.48%, down from 2.80% at the end of November. The ten-year yield also fell, ending December at 2.69%, from 3.01% a month earlier. The Bloomberg Barclays US Aggregate Bond Index returned +1.84% for the month. [Index return: Bloomberg; Bond yields: US Treasury]
After a brutal October, the market relaxed a bit in November. Stocks rallied sharply in the immediate wake of the midterm elections, fell just as sharply in the middle of the month – largely, it seems, because of uncertainty regarding US trade policy toward China and what the results of that policy might be – and then turned upward after Thanksgiving, as the signing of the US trade agreement with Canada and Mexico and early signs from the G-20 summit allowed market participants to express a bit of cautious optimism. The S&P 500 index returned +2.04% for the month. The Mid-cap 400 index returned +3.12%, and the Small-cap 600 index returned +1.50%. [Index returns: Standard and Poors]
Overseas market were relatively quiet, in spite of ongoing uncertainty about the shape of the United Kingdom’s exit from the European Union. The MSCI EAFE international equity index returned -0.22% in local currencies. The US dollar advanced a bit, to 113.54 yen from 112.86, but it was nearly unchanged against European currencies. The dollar ended November at $1.1323 to the euro and $1.2772 against the pound Sterling. A month earlier, it traded at $1.1332 to the euro and $1.2779 to the pound. EAFE returned -0.13% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
Interest rates fell, reflecting the possibility that economic growth may be on the verge of slowing. The yield on the two-year US Treasury note fell to 2.80%, from 2.87% a month earlier. The ten-year yield fell to 3.01%, from 3.15% at the end of October. Accordingly, the Bloomberg Barclays US Aggregate Bond Index returned +0.60% for the month. [Index returns: Bloomberg; bond yields: US Treasury]
October was an ugly month in the markets, with stocks sliding sharply and persistently for most of the month, before recovering a bit during the final couple of trading days. Some market participants cited an unusually sudden rise in interest rates to explain the drop. That may have been a factor, but the downturn may also have reflected a realization of the scale of the political risk – not so much from the midterm elections as from the future direction of economic policy – affecting the possibilities for economic performance in the coming months. A number of corporate executives cited worries over tariffs in the commentaries accompanying their quarterly reports. In addition to protectionist trade policy, some market participants have also become concerned that the effects of last year’s fiscal stimulus may prove short-lived, and the resulting fiscal deficit could become a problem, perhaps leading to recession, in the medium term. Overall, the S&P 500 index fell by -6.84% for the month, the largest monthly loss since 2011. Mid- and small-cap stocks fared even worse, as the Mid-cap 400 index returned -9.55%, and the Small-cap 600 index -10.48%. Growth stocks generally fell more sharply than value stocks. [Index returns: Standard & Poors]
The market selloff was a global affair; the MSCI EAFE international equity index fell by -6.54% in local currencies. With interest rates rising, the US dollar remained strong, strengthening to $1.1332 against the euro and $1.2779 against the pound Sterling at the end of October, compared to $1.1622 and $1.3053, respectively, at the end of September. Sterling was also weak, in part, due to uncertainty surrounding the terms of the UK’s exit from the European Union. The dollar did ease to 112.86 Japanese yen, from 113.48 a month earlier. The currency movement worked against US investors, and EAFE returned -7.96% in US dollars. [Index returns: MSCI; Exchange rates: Federal Reserve H.10 release]
The Federal Reserve has continued on its path of retreating from the extraordinarily accommodative monetary policy of the past decade, and that, in combination with the very large supply of US Treasury securities resulting from the fiscal deficit, drove a marked increase in interest rates. The yield on the two-year US Treasury rose to 2.87%, from 2.81% at the end of September. The ten-year yield rose to 3.15% at the end of October, from 3.05% a month earlier. Bond prices fell, reflecting the rate increase, and the Bloomberg Barclays US Aggregate Bond Index returned -0.79% for the month. [Index returns: Bloomberg; Bond yields: US Treasury]
After giving up ground in the second half of June, US equity markets took on a much stronger tone in July and August. Economic performance was generally good. Some cautious analysts have warned, however, that the economy owes much of its recent strength to last fall’s fiscal stimulus, whose effects (aside from a large increase in the fiscal deficit) may well be transitory. The markets also seemed to set aside fears arising from uncertainty about what tariff and trade measures might emerge from Washington. Investors concentrated instead on corporate earnings reports, which, with a few conspicuous exceptions like Facebook’s, were favorable. In September, the market paused in its advance, even though economic indicators and corporate performance remained reasonably strong, and negotiations proceeded throughout the month toward a trade agreement among the US, Mexico and Canada. The S&P 500 index returned +7.71% for the quarter, but the advance masked weakness in the broader market, especially toward the end of the quarter. The Mid-cap 400 index returned +3.86%, and the Small-cap 600 returned +4.71%. [Index returns: Standard and Poors.]
Global markets had an up-and-down quarter, but performed tolerably well. The major issues were worries about US trade policy toward Asia and uncertainty over negotiations regarding the terms of the UK’s planned exit from the EU. Prime Minister Theresa May encountered rough sledding at an EU summit in Salzburg, and observers feared she might also encounter difficulty at her party’s conference in October. The MSCI EAFE international equity index returned +2.36% in local currencies for the quarter, while the US dollar advanced against most other currencies. It rose to 113.48 yen, from 110.71 at the end of June. It also strengthened to $1.1622 against the euro and $1.3053 against the pound Sterling, compared to June 30 levels of $1.1677 and $1.3197, respectively. The currency movement worked against US investors, and EAFE returned +1.35% in US dollars. [Index returns: MSCI; Exchange rates: Federal Reserve H.10 release]
Interest rates rose markedly as the Federal Reserve continued on its path toward tighter monetary policy. The yield on the two-year US Treasury note rose to 2.81% at the end of September from 2.52% at the end of June. The ten-year yield ended September at 3.05%, up from 2.85% at the end of the previous quarter. The average fall in bond prices just offset the bonds’ interest income, and the Bloomberg Barclays US Aggregate Bond index returned +0.02% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]
After delivering strong returns in July and August, US equity markets took a pause in September. While economic indicators and corporate performance remained reasonably strong, and negotiations proceeded throughout the month toward a trade agreement among the US, Mexico and Canada, the major market indices remained quiet. They drifted toward their highs at the end of the month, and the S&P 500 index returned +0.57% for the month. Its advance masked underlying weakness in the broader market, however, as most of the market’s strength was in the largest growth stocks. The Mid-cap 400 index returned -1.10% for the month, and the Small-cap 600 index fell by -3.17%. [Index returns: Standard and Poors]
International stocks performed rather well, despite continuing concerns about US trade policy toward Asia and uncertainty, both in the European Union and within the Conservative Party in the UK, over negotiations regarding the terms of the UK’s planned exit from the EU. Prime Minister Theresa May encountered rough sledding at an EU summit in Salzburg, and observers feared she might also encounter difficulty at her party’s conference in October. Despite these worries, the MSCI EAFE international equity index returned +1.44% in local currencies. The US dollar slipped a bit against the pound Sterling and the Euro. It ended September at $1.1622 to the Euro and $1.3053 against the pound, compared to levels of $1.1596 and $1.2964 at the end of August. The dollar advanced, however, to 113.48 yen, from 110.98 a month earlier. The currency movement worked modestly against dollar-based investors, and EAFE returned +0.87% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
Markets generally, and correctly, anticipated that the Federal Open Market Committee would increase its target Fed Funds interest rate by 1/4% at its September 26 meeting. Interest rates also rose generally. The two-year US Treasury yielded 2.81% at the end of September, up from 2.62% a month earlier. The ten-year Treasury yield ended the month at 3.05%, up from 2.86% at the end of August. Bond prices fell, reflecting the increases, and the Bloomberg Barclays US Aggregate Bond Index returned -0.64% for the month. [Index returns: Bloomberg; Bond yields: US Treasury]
US equity markets followed up their strong performance of July with another in August. Economic indicators continued to be fairly strong, reflecting the effects of last year’s fiscal stimulus. Market participants mostly set aside, at least for the moment, their worries about the possible outcome of changes in US trade relations with key trading partners. They did appear to cheer the announcement of a sketch of a trade entente with Mexico, despite uncertainty regarding what it might mean for US trade relations with Canada. The S&P 500 index returned +3.26% for the month, while the Mid-cap 400 index returned +3.19%, and the Small-cap 600 index returned +4.83%. Growth out-performed value, as much of the return, especially in the S&P 500, remained concentrated in a few very large stocks. [Index returns: Standard and Poors]
International stocks did not perform well during August. The principal issues appeared to be a general trend toward a stronger US dollar, and fears of financial turmoil emanating from the political situation in Turkey. The MSCI EAFE international equity index returned -1.68% in local currencies. The dollar strengthened against European currencies, ending August at levels of $1.1596 against the euro and $1.2964 to the pound Sterling, compared to July 31 levels of $1.1706 and $1.3125, respectively. The dollar slipped a bit, to 110.98 yen, from 111.88 at the end of July. EAFE returned -1.93% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release.]
Perhaps a bit surprisingly, interest rates fell a bit during the month, although the yield curve also flattened further. The yield on the two-year US Treasury note fell to 2.62%, from 2.67% at the end of July. The ten-year yield fell to 2.86%, from 2.96% a month earlier. The Bloomberg Barclays Core US Aggregate Bond index returned +0.64% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]
After giving up ground in the second half of June, US equity markets took on a much stronger tone in July. Economic reports were generally reasonably good. Some cautious analysts have warned, however, that the economy owes much of its recent strength to last fall’s fiscal stimulus, whose effects (aside from a large increase in the fiscal deficit) may well be transitory. The markets also seemed to set aside fears arising from uncertainty about what tariff and trade measures might emerge from Washington. Investors instead concentrated on corporate earnings reports, which, with a few conspicuous exceptions like Facebook’s, were favorable. The S&P 500 index returned +3.72% for the month. Smaller stocks also advanced, though not so strongly — the Mid-cap 400 index returned +1.76%, and the Small-cap 600 index returned +3.16%. [Index returns: Standard & Poors]
Overseas stocks also performed well. The MSCI EAFE international equity index returned +2.63% in local currencies. The uncertainty surrounding US trade actions produced some volatility in currency markets, but the US dollar ended July not far from where it had ended June. The dollar rose to 111.88 yen, from 110.71 a month earlier. It also strengthened a bit against the pound Sterling, ending July at $1.3125 to the pound, compared to $1.3197 on June 30. The dollar eased slightly, to $1.1706, against the euro — it had traded at $1.1677 to the euro at the end of June. The currency move had only a small effect on US investors, and EAFE returned +2.46% in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 release]
Interest rates rose during July, which was not surprising given large Government borrowings, solid economic reports, the Federal Reserve’s policy stance toward monetary tightening, and the possibility of inflation in the future. The two-year US Treasury note yielded 2.67% at the end of July, up from 2.52% a month earlier. The ten-year Treasury ended July at a yield of 2.96%, up from 2.85% at the end of June. The increase in yields reflected a drop in bond prices that, on average, just about offset the interest income in the bond market. The Bloomberg Barclays Core US Aggregate bond index returned just +0.02% for the month. [Index returns: Bloomberg; US Treasury note yields: US Treasury]
US equity markets continued to exhibit substantial volatility in the second quarter, as investors sought to understand the implications of evolving policies on trade, especially with China and our North American neighbors; geopolitical machinations on the Korean Peninsula and in the Middle East; and the economic effects of a stimulative fiscal policy on economy that’s already growing. Corporate earnings reports, which most analysts expected to be strong, exceeded even those high expectations. Those reports may have contributed to a firm market tone beginning in May, but the market’s momentum gave out in mid-June. At that point more market participants began to voice concerns that the trade rhetoric emanating from Washington might not be mere posturing, but could instead result in a damaging trade war. At the same time, some companies began to hint, mostly cautiously, that tariffs and other trade measures could impair their future results. A flatter yield curve, which some see as a possible early-warning sign of recession, may also have worried some investors. Some market commentators even began to suggest that the “sugar high” effects of last fall’s fiscal stimulus may be wearing off. Despite the worries, the S&P 500 index returned +3.43% for the quarter. The Mid-cap 400 index returned +4.29%, and the Small-cap 600 returned +8.77%. [Index returns: Standard and Poors.]
Global markets reflected a similar level of uncertainty, but also performed tolerably well. The MSCI EAFE international equity index returned +3.47% in local currencies for the quarter. However, the US dollar rallied sharply against most other currencies. It rose to 110.71 yen, from 106.20 at the end of March. It also strengthened to $1.1677 against the euro and $1.3197 against the pound Sterling, compared to March 31 levels of $1.232 and $1.4027, respectively. The currency movement proved a significant drag for US investors, and EAFE returned –1.26% in US dollars. [Index returns: MSCI; Exchange rates: Federal Reserve H.10 release]
Interest rates rose markedly as the Federal Reserve continued to signaled its intention to tighten monetary policy. The yield on the two-year US Treasury note rose to 2.52% at the end of June from 2.27% at the end of March. The ten-year yield ended June at 2.85%, up from 2.74% at the end of the previous quarter. The Bloomberg Barclays US Aggregate Bond index returned –0.16% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]
International stocks also vacillated during June, as trade concerns affected markets worldwide. The MSCI EAFE international equity index returned -0.31% in local currencies. At the same time, the US dollar continued to show strength, rising to 110.71 yen at the end of June, from 108.73 a month earlier. It also strengthened to $1.3197 against the pound Sterling, from $1.3289 at the end of May. The dollar was nearly unchanged against the euro. At the end of June, it traded at $1.1677 against the European currency, close to its May 31 level of $1.1670. The currency movement worked against US investors, and EAFE returned -1.22% for the month in US dollars. [Index returns: MSCI; currency rates: Federal Reserve H.10 releases]
Interest rates continued to drift higher, particularly at shorter maturities, reflecting indications of continued monetary tightening by the Fed. The yield on the two-year US Treasury note ended June at 2.52%, up from 2.40 at the end of May. The ten-year yield also inched up, ending June at 2.85%, from 2.83% a month earlier. The rising rates resulted in pressure on the bond market, and the Bloomberg Barclays US Aggregate Bond Index returned -0.12% for the month. [Index returns: Bloomberg; Bond yields: US Treasury]
US equity markets continued to exhibit substantial volatility in the second quarter, as investors sought to understand the implications of evolving policies on trade, especially with China and our North American neighbors; geopolitical machinations on the Korean Peninsula and in the Middle East; and the economic effects of a stimulative fiscal policy on economy that’s already growing. Corporate earnings reports, which most analysts expected to be strong, exceeded even those high expectations. Those reports may have contributed to a firm market tone beginning in May, but the market’s momentum gave out in mid-June. At that point more market participants began to voice concerns that the trade rhetoric emanating from Washington might not be mere posturing, but could instead result in a damaging trade war. At the same time, some companies began to hint, mostly cautiously, that tariffs and other trade measures could impair their future results. A flatter yield curve, which some see as a possible early-warning sign of recession, may also have worried some investors. Some market commentators even began to suggest that the “sugar high” effects of last fall’s fiscal stimulus may be wearing off. Despite the worries, the S&P 500 index returned +3.43% for the quarter. The Mid-cap 400 index returned +4.29%, and the Small-cap 600 returned +8.77%. [Index returns: Standard and Poors.]
Global markets reflected a similar level of uncertainty, but also performed tolerably well. The MSCI EAFE international equity index returned +3.47% in local currencies for the quarter. However, the US dollar rallied sharply against most other currencies. It rose to 110.71 yen, from 106.20 at the end of March. It also strengthened to $1.1677 against the euro and $1.3197 against the pound Sterling, compared to March 31 levels of $1.232 and $1.4027, respectively. The currency movement proved a significant drag for US investors, and EAFE returned –1.26% in US dollars. [Index returns: MSCI; Exchange rates: Federal Reserve H.10 release]
Interest rates rose markedly as the Federal Reserve continued to signaled its intention to tighten monetary policy. The yield on the two-year US Treasury note rose to 2.52% at the end of June from 2.27% at the end of March. The ten-year yield ended June at 2.85%, up from 2.74% at the end of the previous quarter. The Bloomberg Barclays US Aggregate Bond index returned –0.16% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]
US equity markets continued to exhibit substantial volatility in April, as investors sought to understand the implications of evolving policies on trade, especially with China and our North American neighbors; geopolitical machinations on the Korean Peninsula and in the Middle East; and the economic effects as stimulative fiscal policy begins to take effect in an economy that’s already growing. Corporate earnings reports, which most analysts expected to be strong, exceeded even those high expectations, but stocks did not respond with any kind of strength in prices. This cement-mixer market (spinning, but not going anywhere) produced a return of +0.38% in the S&P 500 index. The Mid-cap 400 index returned –0.26%, and the Small-cap 600 returned +1.03%. [Index returns: Standard and Poors]
While US markets manifested uncertainty, other equity markets around the world performed strongly. The strength may reflect opportunities that could emerge for trade among Asian and European economies as a result of evolving US trade policies. The MSCI EAFE international equity index returned +4.50% in local currencies. The US dollar strengthened, rising to 109.28 yen, from 106.20 a month earlier, and ending April at $1.2074 against the euro and $1.3751 to the pound Sterling, from levels of $1.2320 and $1.4027, respectively, at the end of March. The currency movement worked against US investors, and EAFE returned +2.28% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 Release]
The Federal Reserve continues to signal its plans to tighten monetary policy, and market participants have become concerned with a possible resurgence of inflation. Accordingly, interest rates rose during the month. The yield on the two-year US Treasury note ended April at 2.49%, up from 2.27% at the end of March. The ten-year yield briefly touched three per cent., but ended the month at 2.95%, compared to 2.74% a month earlier. Due to the rise in rates, the Bloomberg Barclays US Aggregate Bond index returned –0.74 for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]
The markets’ upward year-end momentum carried strongly into January, carrying stocks to a sharp advance that lasted for most of the month. Economic news and corporate earnings were reasonably good, though not exceptional. Toward the end of the month, however, the market changed direction. Stocks fell back in the month’s final couple of days, a decline that intensified and carried through most of February. The change in direction may have to do with an uptick in interest rates, which in turn seemed to relate to concerns over the likelihood that the new tax law, in combination with the spending package Congress subsequently passed, will result in a substantial issuance of US Treasury securities, and with it, the possibility of a resurgence in inflation. Intensifying the market’s volatility in March was the Adminstration’s surprise announcement of protectionist trade measures. As Administration officials have struggled to articulate a coherent policy, and our key trading partners have responded, a picture has emerged of an erratic, half-baked stance toward global trade. The market has generally fallen on news of protectionist measures, and rallied when officials have suggested that the measures the Administration has announced are not serious, but merely negotiating positions. For all the action, the S&P 500 index ended the quarter close to where it began, returning –0.76% for the period. The Mid-cap 400 index returned –0.77%, and the Small-cap 600 returned +0.57%. [Index returns: Standard and Poors.]
Global markets reflected a similar level of uncertainty. The MSCI EAFE international equity index returned –4.28% in local currencies for the quarter. The US dollar fell sharply against other currencies, possibly in response to the same inflation fears that touched the US equity market in February. The dollar fell to 106.20 yen at March 31, from 112.69 at the end of December. It also weakened to $1.2320 against the euro and $1.4027 against the pound Sterling, from year-end levels of $1.2022 and $1.3529, respectively. Overall, the currency movement was favorable to US investors, and EAFE returned –1.53% in US dollars [Index returns: MSCI; Exchange rates: Federal Reserve H.10 release]
The Federal Reserve’s new Chair, Jerome Powell, signaled the Fed’s intention to continue its slow-motion tightening of monetary policy, and rates rose across the yield curve. The yield on the two-year US Treasury note rose to 2.27% at the end of March, from 1.89% at the end of December. The ten-year yield ended March at 2.74%, up from 2.40% at the end of December. The Bloomberg Barclays US Aggregate Bond index returned –1.46% for the quarter. [Index returns: Bloomberg; Treasury yields: US Treasury]
The market volatility that suddenly erupted during February continued during March. Economic indicators remain reasonably strong, but the market reacted badly to the Administration’s sudden, unexpected announcement of an aggressive tariff posture, initially focusing on steel and aluminum, but expanding more generally. As Administration officials have struggled to articulate a coherent policy, and our key trading partners have responded, a picture has emerged of an erratic, half-baked stance toward global trade. The market has generally fallen on news of protectionist measures, and rallied when officials have suggested that the measures the Administration has announced are not serious, but merely negotiating positions. As the immediate effects of trade conflicts weigh most heavily on large firms with global markets, the S&P 500 index bore the brunt of the uncertainty, falling by –2.54% for the month. Smaller stocks had gains – the Mid-cap 400 index returned +0.93%, and the Small-cap 600 returned +2.04%. [Index returns: Standard and Poors]
International equity markets also fell. The MSCI EAFE international equity index returned –2.23% in local currencies. The US dollar fell modestly against foreign currencies. It slipped to 106.2 yen from 106.62 at the end of February. It also weakened to $1.2320 against the euro (compared to $1.2211 a month earlier), and $1.4027 against the pound Sterling (compared to $1.3794). Remember that we quote yen per dollar, but we quote dollars per euro and pound. Accordingly a weakening dollar means a lower quote against the yen, but higher quotes against the euro and pound. The slightly weaker dollar helped US holders of overseas assets, so EAFE’s loss was a bit less, –1.80%, in US dollar terms. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]
The possibility that trade conflicts might weaken the US economy resulted in a drop in long-term interest rates. Also helping moderate interest rates is a general view among market participants that new Federal Reserve Chair Jerome Powell has been acquitting himself well, and will be a steady hand in his role. While the yield on the two-year US Treasury ticked up to 2.27% at the end of March, from 2.25% a month earlier, the ten-year yield fell to 2.74%, from 2.87% a month earlier. The Bloomberg Barclays US Aggregate Bond index returned +0.64% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]
The steady, broad market advance of the past months abruptly lost its momentum shortly after the start of February. The US stock market fell sharply for several days. Some saw the move as partly a re-setting of market valuations after that momentum had carried prices so high. Others pointed out that the combination of the tax bill Congress enacted late last year, along with the spending package they subsequently passed, will lead to both a strong fiscal stimulus and a significant increase in US Government borrowing. The trouble with the fiscal stimulus is that it comes at a time when the economy has been strong, and a more traditional policy prescription would call for fiscal restraint. Accordingly, an increasing number of investors have begun to express concerns that the economy might overheat, leading to inflation and an acceleration of monetary tightening by the Federal Reserve. The market did bounce back strongly from the worst of its losses, and the broad averages ended February at around the same levels at which they had closed out 2017. For the month, the S&P 500 lost –3.69%, the Mid-Cap 400 index lost –4.43%, and the Small-Cap 600 index returned –3.87%. [Index returns: Standard & Poors]
International stocks followed a pattern similar to those in the US, and the MSCI EAFE international equity index returned –3.26% in local currencies. Expectations that US interest rates might increase tended to push the US dollar higher against European currencies. The dollar strengthened to $1.2211 against the euro, from $1.2428 at the end of January, and it also firmed to $1.3794 against the pound Sterling, from $1.4190. The Japanese yen strengthened even more than the dollar, so the US currency ended February at 106.62 yen, down from 109.31 a month earlier. The currency movement worked against US investors, and EAFE returned –4.51% in US dollars for February. [Index returns: MSCI; Currency rates: Federal Reserve H.10 release]
As many anticipated, interest rates did rise across the spectrum of maturities. The yield on the two-year US Treasury note ended February at 2.25%, up from 2.14% at the end of January. The ten-year yield rose to 2.87%, up from 2.72%. Falling bond prices reflected this increase in rates, and the Bloomberg Barclays US Aggregate bond index returned –0.95% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]
The markets’ upward year-end momentum carried strongly into January, carrying stocks to a sharp advance that lasted for most of the month. Economic news and corporate earnings were reasonably good, though not exceptional. Toward the end of the month, however, the market changed direction. Stocks fell back in the month’s final couple of days, a decline that intensified during the initial trading days of February. The change in direction may have to do with an uptick in interest rates, which in turn seems to relate to concerns over the likelihood that the new tax law will result in a substantial issuance of US Treasury securities, and with it, the possibility of a resurgence in inflation. Through January 31, the S&P 500 index returned +5.73%. (It has subsequently given back this entire gain.) The Mid-cap 400 index returned +2.87%, and the Small-cap 600 index returned +2.53%. Growth outperformed value in all market capitalization ranges. [Index returns: Standard and Poors]
International stocks drifted a bit higher; the MSCI EAFE international equity index returned +1.20% in local currencies. The US dollar fell sharply against other currencies, possibly due to those inflation worries, and perhaps due in part to the peculiar comments the US Treasury Secretary made at the World Economic Forum in Davos, where he suggested that a weaker dollar would be good for US business. The dollar fell to 109.31 yen from 112.69 a month earlier. It also weakened to $1.2428 against the euro and $1.4190 against the pound Sterling, from year-end levels of $1.2022 and $1.3529, respectively. The currency movement was strongly favorable for US investors, and EAFE returned +5.02% in US dollars. [Index returns: MSCI; Currency rates: Federal Reserve H.10 Release.]
Interest rates moved sharply higher during January. In addition to worrying about inflation and a large increase in Treasury issuance, market participants also took note of signals from the Federal Reserve that it would continue to pursue a policy of monetary tightening under its new Chair, Jay Powell. The yield on the two-year US Treasury note rose to 2.14% at the end of January, from 1.89% at the end of December. The ten-year yield rose by a similar amount, ending January at 2.72%, compared to 2.40% a month earlier. Because of the rise in rates, the Bloomberg Barclays US Aggregate Bond Index returned –1.15% for the month. [Index returns: Bloomberg; Treasury yields: US Treasury]