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ECONOMIC FLASH – Fed Adopts Less Hawkish Stance

April 2019

US Economy: Weaker US consumption?

While retail sales missed analyst expectations and declined in February (-0.2%), the January figure was revised upward to 0.7%, reducing the sting of the report and suggesting tax-refund tailwinds will provide consumption stability in the next few months.

US Stocks: Investors lose appetite for small-cap.

US large cap stocks didn’t break their stride, posting the strongest returns within equities, whereas small caps lagged. As global growth concerns have risen, high-flying, small-cap companies and their higher valuations bore the brunt of increased risk-aversion year-to-date.

Foreign Stocks: Economic data disappoints.

International stocks posted positive but were muted compared to their domestic counterparts. Weakness in European economic data, including German manufacturing (44.1 PMI) and uncertainty surrounding Brexit, has been giving investors pause.

Fixed Income: Bonds thrive amid global growth slowdown.

Core bonds were among the top performing assets with falling interest rates indicating waning growth prospects. Long-maturity bonds such as the 10-Year Treasury (+2.8%) outperformed, while shorter maturity positions and strategies trailed.

Real Assets: US REITs top performers.

REITs typically perform well in periods with low or falling interest rates and the sector benefitted from both in March. The torrid pace is unlikely to last with economic activity slowing and valuations much less attractive compared to last yearend.

Alternatives: Managed futures win on rate bets.

Managed futures posted their strongest monthly return since January of 2018. Generally, strategies were able to capitalize on bond and interest rate trends. Hedge fund strategies in aggregate were flat.

Equities Total Return

MAR 3 MOS 1 YR
U.S. Large Cap 1.9% 13.6% 9.5%
U.S. Small Cap (2.1%) 14.6% 2.0%
U.S. Growth 2.5% 16.2% 12.1%
U.S. Value 0.4% 11.9% 5.3%
Int’l Developed 0.6% 10.0% (3.7%)
Emerging Markets 0.8% 9.9% (7.4%)

Fixed Income Total Return

MAR 3 MOS 1 YR
Taxable
U.S. Agg. Bond 1.9% 2.9% 4.5%
TIPS 1.8% 3.2% 2.7%
U.S. High Yield 1.0% 7.6% 5.9%
Int’l Developed 0.9% 1.3% (4.0%)
Emerging Markets 0.6% 3.1% (1.2%)
Tax-Exempt
Intermediate Munis 0.7% 2.1% 4.5%
Munis Broad Mkt 1.6% 2.9% 5.2%

Non-Traditional Assets Total Return

MAR 3 MOS 1 YR
Commodities (0.2%) 6.3% (5.3%)
REITs 4.4% 17.2% 20.5%
Hedge Funds
Absolute Return (0.6%) 0.6% (0.1%)
Overall HF Market (0.2%) 2.6% (3.1%)
Managed Futures 3.4% 1.9% (0.9%)

Economic Indicators

MAR-19 DEC-18 MAR-18
Equity Volatility 13.7 25.4 20.0
Implied Inflation 1.9% 1.7% 2.1%
Gold Spot $/OZ $1292 $1282 $1325
Oil ($/BBL) $68 $54 $70
U.S. Dollar Index 91.9 92.0 86.2

Glossary of Indices

Our Take

Our chief concern entering this year was the Fed doing too much, too quickly, in terms of increasing interest rates and thereby course correcting the economy too far. That appears highly unlikely now. All communications from the Fed indicate that not only is monetary policy off “rate hike autopilot” but that the balance sheet reduction program will wrap up in September. Financial markets are pricing in no further interest rate hikes this year and only one next year.

With this more accommodative Fed stance and benign interest rate outlook, the worries over rising corporate balance sheet leverage and falling credit quality, which typically precipitate a recession, are potentially concerns that lie further ahead of us than we thought likely as we entered the year. While Q1 earnings are anticipated to show a decline year-over-year, which will likely test the resolve of investors, it is otherwise easy to see the economy and financial markets pressing onward with further positive, if less robust, return opportunities for portfolios.

Our portfolio positioning has become more cautious with some marginal recommended changes designed to lock in year-to-date strong performance and improve our risk exposure, should a significant pullback materialize. At the same time, we continue to emphasize areas which haven’t seen the same market exuberance in the last year, such as emerging markets equities, which should reward patient investors.