See our recap of February's key statistics and market commentary below.
The Russell 2000 TR Index (U.S. Small Cap) returned 5.20 percent during the month of February and is positive by 17.03 percent year-to-date.
U.S. Consumer Confidence reading measured 131.4 for February, this was a strong rebound from a disappointing 121.7 in January.
The S&P Sec/Industrials TR is the top performing S&P 500 sector year-to-date, returning 18.55 percent, better than the S&P 500 TR Index which is positive 11.48 percent. The Industrials sector was the second best performing S& 500 sector for the month of February, returning 6.40 percent.
The strong equity market rally continued through February. The markets were led by small cap equities which were positive by over 5 percent for the month and are now positive by over 17 percent year-to-date. Large-cap stocks also performed well, finishing the month positive by 3.21 percent and are positive for the year by 11.48 percent. International markets performed well, but not quite as well as domestic stocks. Developed markets were positive by 2.55 percent in February and 9.29 percent year-to-date; Emerging markets were positive by 0.22 percent for the month and are positive by 9.01 percent year-to-date.
Interest rates were stable for most of the month before ticking up during the last couple days of the month. As a result, returns were fairly stable for higher quality fixed income investments. The Barclays Aggregate Bond Index lost 0.06 percent for the month and is up by 1.00 percent year-to-date. The high yield, lower credit quality of the fixed income market is performing very well this year as risk assets become more attractive to investors. The high yield index was up by 1.66 percent for the month and 6.26 percent year-to-date.
Earning announcements for the fourth quarter continued to pile in during February with about 90 percent of companies now having reported. As of February 22, about 69 percent of companies have reported earnings above expectations, which is below the five-year average; the average beat was 3.5 percent above estimates, also below the five-year average. The blended earnings growth rate for the fourth quarter is 13.1 percent, which marks the first quarter with earnings growth below 20 percent since the fourth quarter of 2017, but it marks the fifth straight quarter of double-digit earnings growth. The earnings estimates are provided by FactSet. As year-over-year earnings comparisons get more difficult to beat, the earnings outlook for 2019 looks weak. Analysts are expecting earnings to decline during the first quarter and only rise slightly for the second and third quarters. On the surface these numbers may seem troubling, but last year’s comparable numbers were inflated because of the lower corporate tax rates that went into effect January 2018, as a result these lower growth figures are broadly expected and should not be a surprise to the markets.
There continues to be some continued signs of a global economic slowdown while other readings are showing a rebound. Preliminary global manufacturing data from the U.S., Europe and Japan show these markets are slowing. The U.S. reading dropped but stayed above 50, which indicates expansion. However, the European PMI fell below 50 for the first time since 2013 and Japan’s reading also fell below 50—the first time since 2016. A reading below 50 indicates a contraction. Housing data continues to be light. Based on the S&P Case-Schiller index, home prices in December rose at the slowest pace since August 2015. Other housing data, like housing starts and permits to build, have also come in sluggish. U.S. Consumer Confidence bounced back in February after falling in January on concerns around the government shutdown and fourth quarter stock market volatility. The February Consumer Confidence reading was 131.4 compared to January’s reading of 121.7. The U.S. GDP for the fourth quarter beat expectations; economic growth showed a 2.6 percent increase compared to the 2.2 percent estimates. As a preliminary reading, the number may be revised, but assuming it stays as is, the average growth for calendar 2018 would be 3.1 percent.
There were some positive comments made by President Trump as well as from some Chinese representatives around the trade discussion between the two countries. The talks were going so well that President Trump announced that he would postpone the tariff increase that was set to take place in early March. A deal is yet to be reached, but the talks look promising. While making some good progress with China, President Trump also threated Europe with automobile tariffs. So maybe once we get through the Chinese trade war, President Trump may begin a trade skirmish with Europe?
The newly released Fed minutes reiterated a “patient” stance but did leave room for a late year rate hike should economic conditions warrant the action. The Fed also indicated that they would look to end the balance sheet reduction by the end of 2019. The Fed minutes were generally bullish for equity markets, as many investors applaud stable rates and a plan to halt the balance sheet reduction.
There has not been much additional guidance around Brexit, which is supposed to be completed by March 29. Many believe it is too late and the sides are too far apart on many of the important issues to get a deal completed by the deadline. Prime Minister Theresa May is publicly saying that she believes a deal can still be reached and her focus is on getting a deal by the deadline. There are a few important dates to watch in March. There will be a vote on March 12 for a deal between the European Union (EU) and UK, should this deal be voted down, which many expect, then a vote will be held on March 13 to determine if the UK should leave with no deal. It is expected that most officials would prefer a deal before leaving, so if this vote is rejected then another vote will take place requesting an extension to the March 29 deadline. The default option of the departure framework is for no deal, so an extension would need to be approved by the EU.
After markets became oversold during the December sell-off, they have rebounded with a strong start to the year. We remain constructive on the short-term economic outlook; lower interest rates are a positive for the economy, at least in the short-term, and we believe there is a strong possibility that a trade deal gets worked out between the U.S. and China. But with all that said, we warn that a market pause may be in the cards, or we may see a “buy the rumor, sell the news” type of reaction to the trade deal agreement, if an agreement is formally reached.
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