Our short-term economic outlook improved to neutral in April and we continue to believe U.S. stocks are positioned to outperform U.S. bonds as well as international developed market stocks in the near-term.
Global equity markets rallied for the fourth consecutive month during April. In the U.S., large cap stocks reached an all-time high by the end of the month, appreciating +4.0%. Abroad, both developed and emerging markets also performed well, rising by +3.5% and +2.6%, respectively.
In Europe, equities rose by +4.3%, despite mixed economic data. Indeed, Germany realized weaker-than-expected manufacturing data and its government lowered growth forecasts from+1.0% to +0.5% for 2019. On the contrary, Q1 Eurozone GDP exceeded expectations and Q1 earnings season started strong.
Commodities also rallied during April, with the price of oil increasing +6.3%. Supply side constraints were a primary driver of oil’s ascent: OPEC cut production, Venezuelan and Iranian output dropped, political tensions rose in Libya and the U.S. ruled out an extension to Iran sanction waivers. All of these factors crimped the current supply of oil as well as forecasts for forward looking expectations. Strong demand was also a factor that drove prices higher. Support also came from hedge fund managers, where their position in crude oil approached 11:1 (longs to shorts), the highest position in recent months
The US dollar was up +0.10% in April and +0.31% YTD. Regardless of the Fed’s dovish pivot in forward guidance earlier in the year, the US dollar has received support on the back of decent US economic data and more accommodative monetary policy abroad.
The U.S. ten-year yield rose nine basis points during April. Support came from manufacturing data and optimism over US-China trade talks. However, below consensus core CPI (Consumer Price Index) prevented the ten-year yield from rising further.
U.S. equity volatility, as measured by the VIX index, continued its downward trend and ended the month at 13.1. This marked a -4.3% drop versus March’s month-end level and was far below the index’s long-term average of 19.2.
Short-Term Market Outlook
Our proprietary leading economic indicator improved slightly month-over-month, but remains in neutral territory. Improvements in global trade data and initial employment claims strengthened our indicator’s outlook, while declines in average hours worked and new order inventory detracted from it.
Our outlook for U.S. stocks outperforming bonds remains in positive territory. Valuation continues to be the largest driver of this preference, as the factor’s strength ranks in the top quartile on a historical basis.
We continue to believe that U.S. stocks are positioned to outperform their international developed market counterparts in the near-term. In fact, our conviction level is currently the highest it’s been in over five years. Our preference is driven by options market data (which shows greater demand for volatility protection in international-developed markets than in the U.S.), better price momentum in the U.S. and yield curve dynamics. Yield curves in other developed markets are flattening at a faster rate than in the U.S. which we interpret as a sign of lower economic prospects.
In U.S. fixed income, we think that high yield bonds will outperform investment grade bonds during the next month. This stance has strengthened as spreads between high yield and investment grade bonds have narrowed.
We believe European stocks are forecasted to outperform European bonds. Five of the six explanatory variables we consider concur with this conclusion, including European stock price momentum, valuation, spreads on short-term banking lending rates, and European government yields.
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, April 30, 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.