A Strong Start to 2019 but Days of Volatility are not Behind us
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 01/04/19. Rates and Economic Calendar Data from Bloomberg as of 01/08/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
Global equity markets got off to a strong start in 2019, partially on the back of an impressive U.S. jobs report, as nearly every prominent index produced positive returns for the first week of the New Year. In the U.S., the S&P 500 Index pushed ahead to a level of 2532, representing a gain of 1.03%, while the Russell Midcap Index gained 1.13% for the week. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, outpaced its larger counterparts, returning 2.40%. On the international equities front, developed markets moved 0.98% higher, while emerging markets were essentially flat falling 0.07%. Finally, the 10 year U.S. Treasury yield continued to descend lower settling at 2.67%, a level that hasn’t been seen since early 2018.
Global equity markets, and the U.S. equity market in particular, benefited from a surprisingly positive jobs report that showed non-farm payrolls increased by a staggering 312,000 jobs; well above the 184,000 new jobs that were expected! Moreover, the report showed that average hourly wages increased by 3.2% from the prior year. Both of these metrics show that more Americans are working, and making more money while doing so, which should ultimately lead to increases in consumer spending, and by extension, continued economic growth.
Last week’s jobs report justifiably gave investors something to rejoice over. However, a couple of prominent risks that plagued markets in 2018 remain. So, exactly which risks linger and which should investors be most concerned about? One such risk is the risk that the Federal Reserve will increase interest rates too fast, consequently stunting economic growth. In our view, the threat level of this particular risk has dissipated materially as a result of recent remarks by Federal Reserve Chairman Jerome Powell in which he essentially said that the Fed would abandon plans to increase rates if they believed doing so was hurting the economy.
An additional sore spot that weighed heavily on global capital markets in 2018 stemmed directly from trade tensions between the U.S. and China. In fact, this particular issue is largely to blame for the steep sell-off in emerging market stocks. We believe that the bulk of volatility caused by this tension is likely behind us, but some uncertainties do remain. The U.S. delegation has indicated a hard negotiation deadline of March 1st, 2019. Ultimately, we believe that some form of an agreement will be reached by the deadline, but investors would be wise to anticipate wild swings up until (or potentially after) that deadline.
While we’re hopeful that the ultimate end to trade tensions is in sight, and that the Federal Reserve will proceed with caution, there will undoubtedly be bouts of volatility in the interim. During such times, proper portfolio diversification can be critical. As a result, we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios. If you would like to learn more about how we are helping clients invest dynamically and consistently with their own goals, time-frame and tolerance for risk, please do not hesitate to speak with your Hennion & Walsh Financial Adviser.
Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion & Walsh cannot guarantee the accuracy of said information and cannot be held liable. This information is provided for informational purposes only and is not a solicitation to buy or sell any of the asset classes or sectors discussed.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.