Domestic equity investors have been on a wild ride in recent years with the S&P 500 Index experiencing periods of 20% and 15% growth, followed by 10% and 20% declines, respectively, during the 18-month period prior to January 1, 2019. During the first quarter of 2019 domestic equity markets were once again on the move with the S&P 500 Index rallying 20% from its low on December 24, 2018, reversing the majority of losses experienced in the fourth quarter of 2018, and finishing just 3.3% off all-time highs.
Mid-cap stocks were the best performers with the Russell Mid Cap Index returning 16.5% during the quarter. In contrast to the previous quarter, growth-oriented stocks outperformed their value-oriented counterparts across all market-caps. Following a difficult fourth quarter, Technology was the best performing sector, followed by Real Estate and Industrials. Healthcare was the worst performing sector, following a year of relative outperformance, as potential regulatory changes weighed on investor sentiment.
International equity markets rebounded from the sharp declines experienced in the fourth quarter of 2018, but generally underperformed domestic equity markets. Japanese stocks lagged with the MSCI Japan Index returning just 6.7% as exports and production slumped on the back of slowing global growth. European markets benefited from the European Central Bank’s surprisingly dovish tone as it announced that it would leave interest rates unchanged until at least 2020, acknowledging the negative impact trade tensions and geopolitical concerns have had on the region’s economy. Emerging markets benefited from a more accommodative tone from central banks, and perceived improvement in U.S.-China trade relations, with the MSCI EM Index rising 9.9%.
The Federal Open Market Committee (“FOMC”) held the target range for the federal funds rate at 2.25% to 2.50% during its March meeting and lowered its forecast for U.S. economic growth. The yield of the benchmark 10-year Treasury Note declined significantly in March after the FOMC indicated that no rate hikes are expected in 2019. After remaining relatively flat for the first two months of the year, 10-year Treasury yields fell from 2.61% on March 19th, to a 15-month low of 2.39% on March 27th, before ending the quarter at 2.41%. The yield curve continued to flatten with the short end of the curve inverting and the spread between 2- and 10-year Treasuries finishing the quarter at just 14 basis points.
The initial estimate of first quarter gross domestic product (GDP) came in well above market expectations at 3.2% growth. Net trade accounted for around 1% of growth, with exports jumping by 3.7% and imports falling by 3.7%. Other positive contributors to GDP growth included personal consumption, inventories, government spending, and nonresidential fixed investment, which were slightly offset by a small decrease in residential investment. Economic indicators were broadly mixed during the first quarter, impacted by the government shutdown and a series of other economic crosscurrents. Consumer confidence rebounded in March after sharply declining in January. Global economic growth continued to slow as fears relating to the U.S.-China trade war and a potentially disorderly Brexit persisted.
The unemployment rate decreased marginally from 3.9% to 3.8% during the first quarter of 2019. The labor force participation rate remained relatively flat, ending the quarter at 63.0%. The U.S. economy added an average of 180,000 jobs per month during the first quarter, despite adding just 33,000 jobs in February. In the March report, notable job gains were seen in health care and in professional and technical services.
The year-over-year headline inflation rate fell to a two-and-a-half year low of 1.5% in February before ending the quarter where it started at 1.9%, as food prices and easing energy deflation drove the index back up. During the same period, core inflation, which excludes food and energy, fell from 2.2% to 2.0%. Increases in the indexes for housing, medical care, and new vehicles helped to offset declines in the indexes for apparel, used cars and trucks, and airline fares during March.
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