Risk On. Following one of the worst December’s in the last 30 years, in 2019 equity markets began with one of the strongest January rallies in decades. Though momentum waned in February for developed market equities, risk assets continued higher, and the S&P 500 is now off to the best two-month start to a year since 1991 (in case you’re curious, the S&P 500 finished 1991 with a 30% gain, though that is not a prediction for 2019).
International equities are lagging their domestic counterparts, but double-digit returns only two months into the year are impressive nonetheless. Emerging market equities, in particular, were boosted in February by positive news on a U.S./China trade deal and evidence that the Chinese government untapped the credit spigot to stimulate slowing growth in the world’s second-largest economy.
Incidentally, commodities have also been well bid in 2019. Crude oil has been a significant beneficiary of not only the promise of the U.S./China trade deal, but also from OPEC’s commitment to reduce production. The price of WTI Crude is up 26% to just over $57 per barrel.
Sources: Bloomberg Finance L.P. and Covenant Investment Research
Interest rates remain low by historical standards, but high compared to the rest of the major developed economies – e.g., the yields on the 10-year German Bund and Japanese JGB’s are 0.17% and -0.01%, respectively. Importantly, of late there has been a modest steepening in the US Treasury curve. In addition to the entire yield curve shifting 0.03% to 0.08% higher, the 5-year bond yield is now approximately equivalent to that of the 2-year bond, nearly eliminating the inversion that received much attention in Q4 2018. Treasury curve inversions are a traditional signal of slowing growth and/or recession, and the slight steepening is consistent with our view that a recession is not imminent.
The Q4 GDP estimate was released last week and the 2.6% annualized (inflation-adjusted) growth rate was better than anticipated, as consumption and business investment levels exceeded expectations. Following the growth scare and Fed’s hawkish messaging in late 2018, the Q4 report showed that the economic expansion is not over. However, growth peaked in Q2/Q3 of last year and the Fed’s decision in January of this year to pause rate hikes was the correct one for now. We address both topics in Covenant’s Q1 edition of the Economic Review & Outlook scheduled for distribution within the next two weeks.
In the meantime, be well.