Both international and domestic equities rebounded strongly during January after the losses experienced between October and December. In the first month of 2019, the S&P 500 gained 8.0%, the Russell 2000 11.3%, the MSCI EAFE 6.2% and the MSCI EM 8.8%. These gains, however, were from a lower starting point. Even with recent strong performance, the S&P 500 still ended the month down about 7.7% from its peak in September, closing at 2704 on January 31.
The Bloomberg Barclays Aggregate Index gained 1.1% during the first month of the year. The smaller price move is partially due to tamer interest rates during January than over the previous two months. November and December saw drops in the 10-year treasury yield of 15 and 32 basis points respectively, a total decline from 3.16% to 2.69%, over only two months, while rates only moved about 5 basis points over the course of January. Corporate bonds were also boosted by a tightening of credit spreads as the market appeared to regain some of its risk appetite.
In late January, the Fed shifted its tone regarding the possible future sequence of interest rate hikes. Fed Chairman Powell noted that the decision was not a reflection of a substantial change in the outlook for the economy but of various other “cross-currents.” These include a deteriorating growth outlook in China and Europe, uncertainty around the direction of trade policies and potential economic weakness caused by Brexit. On a related note, the Fed also stated that it was prepared to slow the pace of reducing its balance sheet should poor economic conditions arise. Both statements are interpreted as favorable for risk assets, such as stocks and bonds, as they should increase liquidity, the availability of credit, and asset prices.
During fourth quarter 2018, the narrative for oil seemed to be that weakening global growth would shrink aggregate demand, and with it, drag down prices. The selloff in oil ballooned into a loss of roughly 40% from a peak of about $86 to a trough of about $50 for Brent Crude Oil at its worst in late December. Some of those losses were pared however, with a 14.8% gain during January. Energy stocks followed oil over the course of this trend; the Energy Select Sector SPDR ETF fell 30% peak-to-trough but posted just over 10% gains in January.
Chinese officials visited the United States for trade talks late in the month of January, but little progress was made. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will lead a group of officials for further talks in mid-February. The 90-day truce agreed between President Trump and Xi Jinping will expire on March 1, at which time tariffs on $200 billion of Chinese goods could potentially go into effect. Concerns about the outcome of negotiations and the possibility for higher tariffs and reduced global trade have helped amplify volatility over the previous few months.
The last months of 2018 were accompanied by sizeable losses across most asset classes, sectors, and geography. Just as quickly as the losses unfolded, a reversal took hold, reducing some of the losses. This quick shift in market movement speaks to both the speed and unpredictability of the markets. It also highlights the advantage of those longer-term investors who can remain calm and weather near-term volatility rather than panicking and potentially selling near the bottom. A well-diversified portfolio can help smooth volatility and calm fears to allow investors to stay the course.