While our short-term economic outlook is less positive than last month, we continue to believe U.S. stocks are positioned to outperform U.S. bonds as well as international developed market stocks.
Global equity markets continued to rally in March, with the major equity regions exhibiting positive performance. U.S. large cap stocks appreciated 1.9% and finished the quarter with one of the strongest performances in the past decade. International developed and emerging markets also continued to exhibit positive price momentum – rising by 1.5% and 1.4%, respectively.
Oil rallied 5.1% on tighter supply conditions globally. This originated from a surprise drawdown in crude inventories, Saudi Arabia’s energy minister affirming their commitment to cutting oil output and power outages in Venezuela which restricted port loadings and crude production.
The USD rose a modest 0.7% in March, with softer economic data as a headwind - non-farm payrolls, The Consumer Price Index and industrial production all missed on expectations. However, weakness in data across the other major G10 currencies provided support for the USD. The British Pound was the worst performing G10 currency against the US Dollar following negative developments with the Brexit negotiations.
The 3M-10Y U.S. yield curve spread inverted at the end of the month, with the ten-year yield dropping to a recent low of 2.4%. The Federal Reserve surprised the market, providing downward revisions to their rate hike expectations to zero in 2019 and one in 2020. The Federal Reserve also announced a sooner than expected end to their quantitative tightening program.
U.S. equity volatility, as measured by the VIX index, continued its downward trend and ended the month at 13.7. This marked a 7.2% drop versus February’s month-end level and was far below the index’s long-term average of 19.3.
Uncertainty around U.S.-China trade negotiations continued over the month. US Trade Representative Lighthizer commented that a trade deal with China remained a “big if”, and Bloomberg reported that there could be a delay in trade talks until June. However, stimulus from the Chinese authorities and a positive manufacturing PMI reading led to the Chinese stock market rising 2.4%.
Short-Term Market Outlook
Our economic outlook remains negative versus last month driven by average hours worked, new orders inventory and new building permits.
We continue to believe that U.S. stocks are positioned to outperform U.S. bonds as well as international developed market equities. Our preference for U.S. equities is supported by options market data (which shows greater demand for puts in international-developed markets than in the U.S.), better price momentum in the U.S. and yield curve steepness. Despite the fact that one measure of the U.S. yield curve inverted in March, our model observed that yield curves in other developed markets are flattening faster than in the U.S. market.
We continue to believe that U.S. high yield is positioned to outperform U.S. investment grade. However, this position has moderated due to spread widening between high yield and investment grade bonds — this is an indicator of stronger performance in investment grade bonds.
European stocks are forecasted to outperform European bonds in our model. Our conviction in this position has increased over the past month due to improvements in the European Leading Indicator index and our U.S. stocks versus bonds signal, which itself was impacted by global trade data, average hours worked and initial unemployment claims.
Source: Bloomberg, as of 3/31/19.
Asset Class Preferences are based on QS Investors proprietary quantitative factor models. These rules-based financial models use a combination of indicators that analyze asset valuations, investor sentiment, and the broad economy.
All data Source: Bloomberg, March 31, 2019, unless otherwise indicated.Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI EAFE Gross Total Return Local Index; U.S. Equities represented by the S&P 500 Total Return Index; U.S. Small Cap Equities represented by Russell 2000 Total Return Index; Italy Equities represented by MSCI Italy Index (MXIT Index); Spain Equities represented by MSCI Spain Index (MXES Index); Greece Equities represented by MSCI Greece Index (MXGR Index). China Equities represented by MSCI China Net Total Return Local Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; Emerging Market Fixed Income represented by J.P. Morgan EMBI Global Core USD Index.
QS Leading Economic Indicator Index is a proprietary composite of economic data that QS Investors believes are significant in determining financial and economic conditions in the U.S. Past performance or any prediction or forecast is not indicative of future results. QS Leading Economic Indicator Index inception date is 1/2/1970.