Global equity market upside was once again a dominant talking point during the week as gains proved positive. The domestic large capitalization Standard & Poor’s (S&P) 500 gained an impressive 2.56% while smaller publicly traded equities (S&P 600) gained an eye-opening 4.37%. In fact, small cap equities are positive by nearly 16% for the year. Although that sounds strong, they did capture more downside in 2018 and the index is nearly even with that of the S&P 500 on a one-year rolling basis. Despite that fact, we find encouragement in investors’ risk appetites to pursue riskier domestic equities. As the threat of continued global trade tariffs is further amplified in Washington, it’s possible that investors feel pressured to guide allocations closer to domestic revenue sources, despite the risk for higher volatility. We urge caution in over exerting such a move given that it goes against sound risk management guidelines. Calculated and risk centric decisions should guide all investment actions. On the international front, equities within developed economies, as depicted by the MSCI EAFE Index, gained 2.05% during the week as gains in Japan’s Nikkei Index buoyed gains. Japan is the dominant country return attribution to the MSCI EAFE Index. On a rather surprising note, emerging market equities failed to post positive gains during the week. The MSCI EM Index closed lower by -0.50% and was highly influenced by the volatile returns of the Shanghai Stock Exchange (China).
Shifting focus domestically, one of the most notable announcements during the week dealt with the sharp decline of December retail sales. It’s likely that this headline will resurface throughout the month. It’s unclear as to the exact catalyst for such a drop when we consider that corporate guidance on quarterly earnings failed to justify such a weak figure. When we assess the data, however, we must step back and gauge all potential catalysts. Firstly, we cannot take a single data point and extrapolate its meaning into the future – such a process can be futile in our view. Secondly, we believe the decline in growth should not be a substantial shock considering what was happening to equity markets in December 2018. Many investors experienced one of the worst December’s of their investing career. Such weak performance has been followed by one of the best January’s on record. With that in mind, we anticipate a pop for January 2019 retail sales (the proverbial ‘V’ shape moves) but we’re also anticipating the potential for near-term equity market reassessment of what the latest retails sales may entail about economic growth. We’ve discussed extensively in the past the all business cycles eventually end before the next one can begin. Each ending comes in the form of a recession, which can take various forms, depending on the potential for outstretched equity market valuations. Our objective and data driven risk gauge indicates that the potential for a severe economic recession is low, at best. The complete lack of bubble-like events in the equity market, on top of a very strong consumer (as it relates to fiscal status and sentiment), may leave little room for exaggerated swings to the downside. In fact, our research indicates that in the absence of equity market bubbles, such as that in 2000-2002 (tech bubble) and 2007-2009 (credit bubble), global equity markets, as based by the FTSE All World Equity Index, tend to produce muted volatility and muted returns during the duration of a recession. Please reference our analysis, titled ‘Equity Returns and Economic Recessions’. We’re encouraged as to the potential opportunities that may emerge over the next 12-24 months.
Investment Policy Committee:
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.