Murray Titterington, CFP, CIMA
The US equity markets rose again during the second month of the new year, with the Dow Jones Industrial Average and the S&P 500 both posting their best two-month start to a year in nearly three decades. The indices’ rise was aided by dovish comments from the Federal Reserve, thawing of China trade tensions, and better than expected corporate earnings. The gains are in sharp contrast to the melt-down last year, after the worst declines since the financial crisis.
The Dow and S&P 500 are both up 11% this year, their best starts since 1987 and 1991, respectively. The Dow added 7.2% and the S&P 500 gained 7.9% in February. The NASDAQ has gained 14% this year, its best performance since 2012. The tech-heavy index gained 9.7% last month. And the Russell 2000 small cap index posted a 11.2% return for February, notching a whopping 16.8% for the year.
All 11 S&P sectors had positive performance for the month of February. Information Technology was the best-performing sector, rising 6.6%. Industrials were a close second, gaining 6.1%, followed by Utilities, up 3.6%. The worst-performing sectors were Consumer Discretionary (0.6%), and Real Estate and Communication Services (both 0.8%). For the year, Industrials are up 18.2%, Technology has gained 14.8%, and Consumer Discretionary has risen 12.0%.
West Texas Intermediate Crude closed at $57.22 a barrel, a significant rise from the previous month close of $53.79. Prices are up 26% this year, yet are still 25% lower than last October’s peak of $76.41 a barrel. Prices were affected by an affirmation from Saudi Arabia regarding output reduction and an unexpected weekly drop in US crude supplies.
The yield on the 10-year rose 8 basis points last month, closing at about 2.7%. The yields of all of the main Treasurys rose after a gross domestic product report showed that the economy expanded at a 2.6% annual pace in the fourth quarter of 2018, the fastest rate since 2015 (see chart). The rate was higher than the anticipated 1.9% growth rate. Recent comments by the Fed now signal a 92% of no further rate increases this year, and the chances of a rate cut (6%) are now greater than the chances of a rate increase (2%).
Economic indicators were mixed last month. The Chicago PMI rose 8 points to a reading of 64.7, up from 56.7 in January, and the largest increase in a year. Any reading above 50 indicates improving conditions. The Consumer Sentiment Index for February increased to 93.8, above January’s reading of 91.2, yet lower than the anticipated 95.7 number. The unemployment rate remained at 4.0%, probably due to lingering effects of the government shutdown. The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in January on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 1.6%.
From a historical perspective, market gains in January and February have preceded significantly positive years. Since 1938, when both January and February were positive, the year ended up on average more than 20%, and was positive 29 of 30 times. In 26 of the 30 years, the gains were double digits, and in 15 of the 30 years, the returns were greater than 20%.
Through two months, the equity indices are off to a great start for the year, but geopolitical risks remain. The status of US – China trade talks are still a cause for concern, as are a failed US – North Korea summit and yet-to-be determined Brexit repercussions. In general, it appears that the economy is fundamentally sound, but uncertainties remain that may negatively affect market performance. Investors should be prepared for further hiccups by ensuring that their equity exposure matches their risk profile. We maintain that a properly allocated portfolio based on one’s risk profile and a long-term investment horizon are the pillars to achieving investment goals.
The information in this Market Commentary is for general informational and educational purposes only. Unless otherwise stated, all information and opinion contained in these materials were produced by Foundations Investment Advisers, LLC (“FIA”) and other publicly available sources believed to be accurate and reliable. No representations are made by FIA or its affiliates as to the informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. No party, including but not limited to, FIA and its affiliates, assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.
The views and opinions expressed are those of the authors do not necessarily reflect the official policy or position of FIA or its affiliates. Information presented is believed to be current, but may change at any time and without notice. It should not be viewed as personalized investment advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. You should consult with a professional advisor before implementing any strategies discussed. Content should not be viewed as an offer to buy or sell any of the securities mentioned or as legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Investment advisory services are offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.