February was a continuation of the equity market gains produced during the month of January with all the major indices we follow producing very solid gains. Commodities followed suit with another positive month on the back of higher oil prices. The dollar rebounded to end the month slightly positive for the year. This month’s laggard were bonds, which ended the month ever so slightly lower.
U.S. & International Stock Index Returns
|Index February 2019 Year-to-Date|
|Dow Industrials 3.93% 11.10%|
|S&P 500 3.21% 11.08%|
|S&P 400 (Midcap) 4.51% 14.87%|
|S&P 600 (Small Cap) 4.31% 15.24%|
|MSCI World 3.04% 10.72%|
|MSCI EAFE 2.47% 8.94%|
|Bloomberg Agg. Bond 1.00%|
|CRB Commodity Index 7.62%|
|US Dollar Index 0.02%|
All data as of 02/28/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
How good has the start of 2019 been for equity investors? Really good. When is the last time the first two months of the year been this good? 1964.
So far 2019 has been one for the books as the pre-Christmas pessimism feels like it is something from another time, not three months ago. Historically, a good year in the market is a return of somewhere in the 8-10% range. So far in 2019 all the major equity indexes we follow are up more than 10%, with the exception of the MSCI EAFE, which is up almost 9%. What makes this rally more impressive is that February has historically been a tough month for investors, often negative or just slightly positive.
Chart #1 – Source: www.stockcharts.com
The 10-year Treasury Bond spent almost the entire month of February consolidating around the 2.65% level until breaking higher in the last day of the month to close at 2.748%. From our perspective this looks like a possible breakout in yields. We say possible because one day does not make a trend. In March we will be keeping a close eye on how yields react. A move lower to test of the consolidation would not be unexpected and a break above 2.80% would lead us to expect the 10-year Treasury rate to be headed back towards 3.00% in the coming weeks/months.
Chart #2 – Source: www.stockcharts.com
We are of the belief that the consolidation for the dollar will continue until some of the big issues facing the world come to a resolution. More specifically, currencies are likely to move with some resolution to the Chinese trade dispute and Brexit. We are of the belief that the dollar is artificially stronger than it should be right now due to the threat of tariffs on both U.S. and Chinese goods to the global economy. A relief of these tensions would lead us to expect a move the US Dollar Index back to the 89-90 level, last seen in the first quarter of 2018.
Chart #3 – Source: www.stockcharts.com
The strength of the CRB Commodity Index continued on in February with an increase of 1.83% to a 7.62% return for the first two months of 2019. Commodity strength has been seen in both energy and the metals. Gold (chart #5), which peaked in 2011 around $1,900, looks like it has broken out of its downtrend with fresh higher highs and higher lows. A swift move below $1,300 would make us consider changing our viewpoint on the shiny metal.
Chart #4 – Source: www.stockcharts.com
Chart #5 – Source: www.stockcharts.com
March looks to be a very interesting month for investors for a number of reasons. First, the global economy has two major happenings that can be impactful: Brexit and US/China negotiations. What happens come the March 29th Brexit deadline is anybody’s guess right now. We know that Great Britain is due to leave the EU with or without a final deal with the EU. Prime Minister Theresa May hasn’t been able to get enough support for the deal she negotiated, but it is not the 11ths hour quite yet. It is also possible the UK backs out of leaving prior to the deadline. The US/China March 2 deadline for $200 billion of Chinese goods getting hit with a 25% tariff when entering the United States was delayed by President Trump due to “substantial progress,” even as there is no signed official agreement and no details on any agreements have been released to our knowledge.
Second, as mentioned earlier in this piece, bond yields have started to turn higher. After consolidating for a few months, we had a glimpse of what may or may not be the start of a move towards higher yields. Over the next 31 days we should have a much clearer outlook on where yields are headed higher or staying still.
Technically the S&P 500 is currently overbought and just below the 2800 resistance level after a very strong move. At a minimum we believe there is a need for the market to catch its breath here and consolidate a bit. But it would not be unreasonable for more than just consolidation with a more sizable retracement of the recent gains in the coming weeks. A big move higher this month? Possible but not probable in our opinion.
When we look out beyond just the next few weeks, we do remain positive for the stock market. Valuations are only a little higher than the long-term average with room to expand. Fourth quarter earnings came in as expected. Internally the market rally has been broad-based, which gives the market a broad base of stocks to help sustain the rally. Over all, not a bad situation to be in.
With all that said, when we look to the next 31 days what we see is a month that could be pivotal for the rest of the year. In an Ideal world, a meaningful trade agreement with China is reached and Brexit works itself out, pushing the markets higher. In such a scenario we would expect both bond yields and commodity prices to move higher as the US dollar starts to deflate on the news of a US/China trade agreement that eliminates the possibility of trade frictions for the foreseeable future.
Of course, we don’t live in an ideal world so what happens in March will likely be something a little less than ideal. So while we see the markets as constructive, we are not raging bulls at this time. Our outlook is more positive than it was a month ago when we were neutral on the markets. This, we enter March cautiously optimistic on the markets.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
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