Can the Rally Continue?
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 01/11/19. Rates and Economic Calendar Data from Bloomberg as of 01/14/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
The strong start to 2019 continued last week as global equity markets continued to charge forward for the third consecutive week. In the U.S., the S&P 500 Index and the Dow Jones Industrial Average advanced 2.58% and 2.42% respectively while the Russell 2000 Index outpaced its larger counterparts posting a positive 4.84% gain for the week. Smaller capitalized companies significantly under-performed in 2018. However, the asset class has flipped the script thus far in 2019 and is leading the market capitalization pack. Overseas, International developed and emerging markets also had solid gains of 2.89% and 3.77% respectively as measured by the MSCI EAFE and MSCI EM Indexes. Taking a quick look at 10 year U.S. Treasuries, yields increased slightly from the previous week to 2.71%. It’s hard to believe that levels had been over 3.20% at different points during the second half on 2018.
In the week prior, performance was driven by an impressive U.S. jobs report exhibiting strong job and hourly wage numbers. The recent weekly upswing rallied on the back of comments coming from President Trump related to progress around trade/tariff negotiations with China and the Federal Reserve related to future tightening plans. The U.S. and China kicked off a new round of negotiations early in the week with optimistic tones coming from both parties. Not surprisingly the Industrials sector, at times seen as somewhat of a proxy for trade and tariff negotiations, was the biggest gainer last week. Regarding the Federal Reserve, meeting minutes indicated a more dovish tone and a more patient approach to interest rate hikes and, potentially, balance sheet reductions. If you recall, U.S. – China trade & tariff negotiations and Federal Reserve interest rate expectations were two headwinds that we had previously identified that were “keeping a lid” on potential stock market growth. As expected, when positive news is received on those fronts, stocks can be expected to push higher driven by multiple macro and micro tailwinds.
Investors in the U.S. will likely be focused on company earnings, revenues, and forward guidance as fourth quarter 2018 earnings season kicks off this week. Companies in general should continue to grow their businesses, albeit likely at a slower pace than we have seen in the recent past. Recent mergers and acquisitions (M&A) activity, particularly in the healthcare/biotech space, as well as partnership announcements, such as the Microsoft/Walgreens 7-year deal announced this week, have all been encouraging signs for both the economy and the stock market. 2019 has the potential to provide investors with solid positive returns but the days of volatility certainly are not behind us. We will continue to monitor global economic activity and prevailing headwinds. These headwinds currently include the U.S. government partial shutdown, Brexit, and continued U.S. – China trade/tariff negotiations.
Regardless, asset allocation, diversification, and adherence to a longer term, customized financial plan will be critical in the months and years ahead. We encourage investors to stay disciplined and work with experienced financial professionals to help manage their portfolios through various market cycles within a well-diversified framework that is consistent with their objectives, time-frame and tolerance for risk.
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.