Market Commentary


January 2019 Recap

Market Commentary |

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Equity markets in the United States rebounded to start 2019 as the S&P 500 increased by +8.0% – the best monthly return since October 2015 and the best January return since 1987. Recall that the stock market sold off at the end of 2018 (a peak-to-trough decline of -19.8% that bottomed on Christmas Eve) due to fears that a trade war with China, Federal Reserve interest rate hikes, a few missteps by new Fed Chairman Jerome Powell, political turmoil in Washington, and slowing growth internationally could lead to a recession in early 2019. Our view going into 2019 was that while a recession is possible, it still isn’t the most likely outcome based on current economic data. The market has bounced +15.2% since December 26th as a few positive events decreased the likelihood of a recession, including, a temporary end to the government shutdown, some positive news on the US/China trade front, stronger than expected economic data, and the Fed changing their stance on future monetary policy (see below for details).

International markets posted strong results as Developed International (MSCI EAFE) markets increased by +6.6% while Emerging Markets (MSCI EM) gained +8.8%.

Within Fixed Income markets, bonds produced positive returns as the Barclays US Aggregate Bond Index increased by +1.1%.

We’d like to highlight three key events of January 2019:


The ongoing trade war between the US and China stayed in the news again all month as it appears that the two sides are moving closer to an agreement. Mid-level negotiations took place in Beijing at the start of the month. Senior-level negotiations between China’s Vice Premier and a US delegation occurred in Washington toward the end of January. Both sides expressed optimism about the prospects of a deal. Several reports indicate that the two sides are still trying to work through issues of intellectual property rights and technology transfer.

The next round of negotiations will likely occur in China in early February. Shortly after, US President Trump and Chinese President Xi are expected to meet and potentially finalize the agreement. Recall that the two Presidents last met in person in early December. Both sides called the meeting “highly successful” as they both agreed to hold off on implementing any new tariffs for 90 days in hopes that a broader deal can be reached. The United States agreed not to raise their tariff rate from 10% to 25% on $200 billion worth of Chinese goods until March 1, 2019. Both sides are working to complete a deal before the March deadline. However, it is also possible that the deadline is extended due to progress toward an agreement. The ongoing trade war has been an overhang on the stock market due to the potential negative impacts. The situation will remain a market risk until an agreement is signed.


The five-week partial government shutdown ended in late January as Congress agreed to reopen the government until February 15, 2019. The three-week temporary agreement allowed eight hundred thousand federal workers who were either furloughed or working without pay to receive their paychecks and back-pay. Negotiations are underway for a broader deal to avoid another partial shutdown at the end of the three-week window.

The Congressional Budget Office (CBO) estimated the partial shutdown will ultimately cost the United States economy about $3 billion – the agency also stated the closure had indirect effects that are difficult to measure and would have been more significant if the shutdown continued. The CBO also estimated the shutdown will reduce first quarter 2019 GDP by -0.4%, but that subsequent quarters will likely be temporarily higher. The Bloomberg consensus estimate for Q1 2019 GDP is currently at +2.2%.


At the end of 2018, the Fed helped exacerbate the year-end sell-off with their interest rate and balance sheet policies. At their December meeting, the Fed raised the federal funds rate range for the fourth time in 2018, and signaled for two rate hikes in 2019. At the subsequent press conference, Chairman Powell infamously stated that the Fed’s balance sheet runoff plan was on “automatic pilot.” Investors were concerned that by simultaneously increasing interest rates and decreasing the size of their balance sheet, despite several economic warning signals, the Fed could overtighten financial conditions and cause a recession. In our 2018 recap we stated that the stock market would likely react positively to the Fed signaling more flexibility on future interest rate hikes and/or the balance sheet runoff.

The stock market got exactly what it wanted from the Fed in January 2019. At the January FOMC meeting, the Fed stated that they will be “patient” with future interest rate increases. The Fed also released a supplemental statement that specified that they would be flexible with the balance sheet runoff program if economic conditions warrant. The Fed further signaled that the ultimate size of the balance sheet may end up being larger than previously expected. Markets reacted positively to the Fed’s new “patient” and “flexible” approach, and now most investors expect the Fed to pause rate increases until at least the later half of the year.

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Andrew Murphy, CFA
Director of Portfolio Management



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The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

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Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.

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The Barclays Capital U.S. Credit Bond Index measures the performance of investment grade corporate debt and agency bonds that are dollar denominated and have a remaining maturity of greater than one year.

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The Barclays Capital US Corporate High Yield Bond index is an index representative of the universe of fixed-rate, non-investment grade debt
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.

The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 445 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe.

The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 322 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan.

The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa. Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

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