January Monthly Recap
Domestic equity markets kicked off 2019 with a very strong January, as most stocks posted sizable gains that were in sharp contrast to the deep losses experienced in December. The S&P 500 Index posted its best January return since 1987, boosted by signals that the Federal Reserve (Fed) would be more patient with further rate increases and amid improved hope for a trade deal with China. The snapback rally in stocks to start 2019 came off the heels of the worst quarter since 2008 and the worst December since 1931, during the Great Depression. Fear and negative sentiment surrounding rising rates and US/China relations led risk assets to plunge lower in December, but now serve as juxtaposition to the investor optimism regarding these same issues in January. The S&P 500 Index finished January up 8.00%, the Dow Jones Industrial Average gained 7.30%, and the NASDAQ gained 9.80%. The 35-day US government shutdown, which was the longest in history, featured heavily in the news, but did little to discourage investor buying during the month. In central bank news, a dovish Fed was well received by market participants, as it left interest rates unchanged and pledged to be “patient” regarding further rate hikes. Negotiations with China are continuing to progress, which has been viewed favorably, but no official trade details have been announced yet.
Within the context of a more dovish Fed, improving trade relations with China, and a temporary resolution to reopen the government, investors moved back into risk assets. Small cap domestic stocks outperformed large cap equities, as the Russell 2000 Index gained 11.30%, while the Russell 1000 Index gained 8.40%. Mid cap stocks outpaced large caps as well, but slightly trailed small caps, with the Russell Mid Cap Index gaining 10.80%. Growth stocks outperformed value stocks, with the Russell 3000 Growth Index returning 9.20%, compared with 8.00% for the Russell 300 Value Index. In terms of S&P 500 Index sector performance, Industrials was the strongest performer, gaining 11.40%, followed by Energy, which rose 11.10%, as oil prices surged. Utilities and Health Care were the main laggards, with gains of 3.40% and 4.80%, respectively. The January jobs report showed a gain of 304,000 jobs, bringing the three-month average to 241,000. The unemployment rate ticked higher to 4.00%, as labor force participation increased and the government shutdown may have had an impact on unemployment. Quarterly earnings releases have led to some single-stock volatility, but on the whole, earnings have been slightly better than expected. With roughly 40% of companies reporting earnings through month end, earnings-per-share growth is 15% higher year over year thus far. Commodities gained 5.50% behind a surge for oil, while relative weakness in precious metals, livestock, and agriculture lowered overall results.
International equity markets also posted strong results to start the year, with performance mostly in line with large cap domestic stocks, as the MSCI ACWI ex-U.S. Index increased by 7.60%. In Europe, the focus remained on geopolitical issues, including Brexit uncertainty, “yellow vest” protests in France, and Italy’s struggles to gain budget approval. Two global central banks, the European Central Bank and the Bank of Japan, kept monetary policy unchanged and stand ready to be more accommodative if necessary. Similar to those in the US, the largest driver for international markets in January centered on the potential for improved trade relations. The MSCI EAFE Index, which measures performance of international developed equities, gained 6.60%. Emerging markets surged higher in January after a relatively strong fourth quarter, in which they fared best amongst major equity indices. The MSCI EM Index gained 8.80%. Emerging markets in both Latin America and China were regional strong performers, rising 15.00% and 11.10%, respectively.
Fixed income markets posted modest gains for the month, especially when compared with the strong rebound that equities experienced. Treasury yields remained mostly steady through the month, with yields ending January slight lower when compared with the end of December. The yield on the 10-Year U.S. Treasury Note declined five basis points to 2.63% from 2.68%. In response to the Fed’s statement and dovish tone, shorter-term bond yields also declined, with the yield on the 3-Month U.S. Treasury Bill declining to 2.40% from 2.45%. The Barclays U.S. Aggregate Bond Index gained 1.10% for the month. Credit spreads tightened, leading to global bonds outperforming domestic fixed income and high yield outpacing investment grade. The Barclays Global Aggregate ex-U.S. Index gained 1.90%, while the Barclays US Corporate High Yield Index gained 4.50%. Municipal bonds mostly trailed their taxable peers for the month, but still posted a slightly positive result, with the Barclays Municipal Index gaining 0.80%.