February 2019 | Marco Fragnito | Managing Principal
- The short-term crisis of confidence witnessed in December appears to be subsiding considering comments from the Federal Reserve, a reduction in trade tensions, and mostly positive earnings in Q4.
- Monitoring the Federal Reserve over the next few months will prove critical in the future direction of our allocation strategy.
US equity markets rallied sharply in January. The S&P 500 rose 7.9%, its largest monthly increase since 2015 and best January performance in over three decades. The Dow Jones Industrial Average rose 7.2%, while the NASDAQ saw a 9.7% gain. It appeared that the short-term crisis of confidence in December was replaced with renewed confidence in financial markets. Contributing to rising investor sentiment was the perception that the Federal Reserve appeared much more aware of investor concerns in not only the pace at which they were raising interest rates, but also the impact they were having on financial markets. Combined with reduced trade tensions between the US and China, and largely positive fourth quarter earnings reports, equity markets forged ahead despite slowing global growth and a partial government shutdown. Although risks to equity markets remain, things look better to investors than they did just one month ago.
With all the global uncertainty, the Federal Reserve offered a clearer picture on monetary policy, withFed speakers seem to suggest in numerous speeches that they were prepared to take a more patient approach to rate hikes and become much more dependent on Incoming economic data. This was further reiterated at the conclusion of the FOMC policy meeting, and Federal Reserve Chairman Powell hinting at flexibility in the pace of reducing the Fed balance sheet. This was in sharp contrast to Powell’s comments in December, where he continued to maintain that asset sales remained on “autopilot.” Following the meeting and these comments, investors began pricing in a very small chance of any rate hikes in 2019, this allowed Treasury yields to move lower across the yield curve. The yield on the benchmark 10-year Treasury note ended the month at 2.63% down from a high of 3.25% in early last October.
While the December jobs report showing that US nonfarm payrolls rose by 312,000 far above expectations, other US economic data remained mixed especially in the housing sector. Lower interest rates could provide much needed relief to the housing sector and to several foreign economies which peg their domestic interest rates to ours.
With equities markets off to very strong start in 2019 we should expect some moderating in their upward ascent in the coming weeks if not a correction of recent gains. With investor concerns appearing to have been discounted and more importantly with monetary authorities paying more attention to the downside risks present in global economic growth, we are moving to a more bullish posture in our managed portfolios. While we do not feel a need to be fully invested over the very near term, we do expect to increase our exposure to equity markets over the next few months depending on the Federal Reserve’s approach to monetary policy. In the fixed income markets, we remain positive on short term bonds and alternative income instruments.
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Sources: Wells Fargo Advisors, Angela Shin, “Monthly Market Commentary,” February 5, 2019.
The opinions expressed here reflect the judgement of the author as of this date and are subject to change without notice. Information presented here is for informational purposes only and does not intend to make an offer, solicitation, or recommendation for the sale or purchase of any product, security, or investment strategy. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed here. The information being provided is strictly as a courtesy.