Global equity markets remained largely upbeat during the week as positive sentiment appeared to push prices higher, albeit modestly. Emerging markets remained at the forefront with a gain of 1.42%, as depicted by the MSCI EM Index. Domestically, the Standard & Poor’s (S&P) 500 large capitalization index gained 0.58% for the week and remains in positive territory for the year by approximately 3.04%. It’s important to note that it is impossible to invest directly into an index. Investable equivalents for the S&P 500 have gained less than 2.94% thus far into 2018. One interesting component of domestic equity markets in 2018, especially considering the notable upside we’ve experienced post the highly anticipated correction, is that mid-sized companies, as well as small capitalization companies, are underperforming the S&P 500 (S&P 400 and 600, respectively). As prudent asset managers, we invest across an array of domestic equities and are puzzled to see such discrepancy year-to-date, despite the perceived higher fiscal policy benefits to companies outside of the S&P 500 realm. Nonetheless, from a risk management standpoint that is aimed at long-term risk-adjusted returns, we remain confident that domestic diversification, in addition to strategic international diversification (both currency hedged and non-currency hedged), remain as best practices to well-built investment portfolios. Stepping away from global equities, the notion of risk has been unexpectedly evident within the fixed income market. The idea that bonds can provide strong downside protection in times of equity market stress has not entirely played out in 2018. Through the year-to-date trough of the S&P 500, total return stood at -3.32% while the Bloomberg Barclays U.S. Aggregate Bond index stood at -2%. Broadly speaking, bonds have not behaved in such a manner over the past 5-10 years. We’re now at a crucial inflection point where the 10 year U.S. yield is the highest we’ve seen since mid-2013 and puts into question the real benefit of fixed income holdings amidst an economic cycle that remains robust. As the economy grows, and unemployment further shrinks, interest rates tend to swing higher, which hurts bond prices. Although we would agree that bonds may provide a benefit in times of critical stress, investors should strongly consider repositioning themselves when the opportunity arises.
Economic data releases remained light for the week as data tied to existing home sales proved to be the only noteworthy release. Sales in January indicated a 3.2% drop on a monthly basis and the announcement did not phase investors at the slightest. In our view, short-term data must be evaluated relative to other exogenous factors. Not only is one month’s data point irrelevant in the whole scheme of things, but it’s also important to note the cold weather, as well as the snow, that took place throughout January. Historically, weather adjusted sales on items such as homes and automobiles tend to be influenced by weather. We’re not the least concerned with the latest housing data and believe that the current interest rate environment remains favorable for home ownership.
Looking ahead, a crucial election in Italy next week may play a dominant role in the region’s economic growth potential. As Europe’s third largest economy, as well as the region’s weakest link, Italy appears to be favoring a populist approach that appears puzzling to us at the moment. Nonetheless, consumers encompassing the European Union look healthy and the ability of a rising tide to lift all boats, so to speak, may prove beneficial to Italy.
Investment advice offered through CX Institutional, a registered investment advisor.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.