Following the very difficult end of 2018, stocks made a strong comeback in the first quarter of 2019, and most of it hinged on the Federal Reserve.
We have come a long way since Fed Chairman Powell appeared to drive down the market on October 3 with these comments: “The extremely accommodating low interest rates we needed when the economy was quite weak, we don’t need anymore. We may go past neutral, but we’re a long way from neutral at this point, probably.” With the new year, sentiment changed and stocks embarked on a major rally on January 4, when Mr. Powell reversed course and said “We will be prepared to adjust policy quickly and to use all our tools to support the economy should that be appropriate to keep the expansion on track.”
The rally continued this month as the U.S. led the way, with the S&P 500 Index increasing 1.9% in March; international and emerging market equities were also in the black, with the Developed International and Emerging Markets indexes up 0.6% and 0.8% during the same period, respectively. The dovish pivot by the Fed was sustained when on March 20, Powell said, “I don’t feel we have kind of convincingly achieved our 2% inflation mandate in a symmetric way,” indicating the Fed is willing to risk economic overheating and rising inflation. Bulls lifted stocks to new five-month highs.
These comments also appeared to bolster fixed-income returns, broadly causing yields to decline. In the U.S., a segment of the yield curve—measured by the spread between the 10-year Treasury note and 3-month Treasury bill—inverted. By the end of the month, the inversion had reversed, even as the 10-year U.S. Treasury yield declined 30 basis points to 2.42%. Meanwhile, 10-year German and Japanese bond yields fell into negative territory. Within credit in March, the Barclays U.S. High Yield index returned +0.9% while Emerging Market bonds fell 1.3%, given a stronger dollar.
From a Factor perspective, March was a strange and difficult month. Low Volatility worked for the first time this year and was the best performer. Momentum was not far behind Low Volatility. The Size factor, a notable holding for CIG, ended its winning streak and was down -0.8% during the month. Value, which has not been a productive Factor and even more so this month, lost -1.2%. The Russell 100 Equity Weighted Index was up 0.81%, or about one half of the S&P 500, which suggests that the low volatility, mega-sized stocks were the place to be in March.
The U.S. economy is giving the impression that it is advancing into the late stage of its expansionary cycle. Given the more pronounced risks and volatility historically associated with this stage, diversification is central to helping investors achieve their financial planning goals. As such, after a strong first quarter for risk assets, we are rebalancing portfolios to include non-correlated and value-added positions, as well as increasing international exposure, as we look to Q2 2019 and beyond.