Improvements in global trade data and building permits helped lift our economic outlook in February versus January, but it remains in negative territory overall.
Global equity markets continued to rally in February, with the major equity regions exhibiting positive performance. U.S. equities were especially strong, with U.S. large cap stocks appreciating 3.2% and U.S. small-cap stocks appreciating 5.2%. International developed and emerging markets also continued to exhibit positive price momentum – rising by 3.5% and 1.1%, respectively.
Oil rallied 6.4% on tighter supply conditions globally. Brent crude reached a recent high over the month; however President Trump tweeting that oil prices were too high led this high point to last only briefly. Tighter supply conditions came from the U.S. reducing its drilling, OPEC indicating reduced supply and the U.S. imposing sanctions prohibiting U.S. companies and individuals from purchasing from PDVSA (the Venezuelan state oil company).
The USD rose a modest 0.8% in February. Mixed data within the U.S., strong job numbers and solid wage growth were offset by weaker than expected factory orders, retail sales and industrial production. Weakness in data prevailed across the other major G10 currencies, and this provided support to the USD. The lagged industrial production data showed that the Eurozone entered an industrial recession in the prior quarter.
The U.S. yield curve steepened in February, with the two-year yield rising six basis points and the ten-year yield rising nine basis points. The ten-year yield rose due to speculators’ net bearish bets on the Treasury note reaching a recent high.
U.S. equity volatility, as measured by the VIX index, ended the month at 14.8, a 10.8% drop compared to a month earlier. Retail investors continue to withdraw money from U.S. equities; however support has come from “smart money”, as measured by a Bloomberg index that seeks to capture the sentiment of experienced, institutional traders.
Trade related news dominated this month, beginning with President Trump threatening that the U.S. would impose tariffs on European car imports if a trade deal cannot be reach. President Trump then extended the deadline on raising tariffs on Chinese goods, as both countries continue to negotiate on a trade agreement. This led to the USD-CNY (i.e. US Dollar-Chines Yuan) exchange rate to reach a near-term low.
Short-Term Market Outlook
Our economic outlook remains in negative territory; however it improved versus last month. An improvement in global trade data and building permits were the primary drivers.
QS Leading Economic Indicator
Improvement in the QS Leading Economic Indicator led to favoring global stocks versus global bonds.
We continue to believe that U.S. stocks are positioned to outperform international developed stocks. Our preference for U.S. stocks in this model is supported by options market data and yield curve steepness. On the other hand, price momentum has reversed from favoring U.S. to international stocks.
We continue to believe that U.S. high yield is positioned to outperform U.S. investment grade. This sentiment is due to the spread compression between high yield and investment grade bonds (an indicator of stronger performance in high yield) and the low level of U.S. equity volatility.
European stocks are forecasted to outperform European bonds in our model, a sharp reversal compared to last month. This positional change is due to the improvement in three of the six factors in our model, the European Leading Economic Indicator, global stocks versus bonds and price momentum.
Source: Bloomberg, as of 2/28/19.
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.
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.