Global stocks finished at a gain of 5.64% in the month of January, just slightly off their all-time high. Emerging market (EM) stocks led the way once again with a gain of 8.33%.Europe and Japan also marked strong gains for the month with an increase of 5.40% and 4.58%, respectively.However, much of these gains (greater than half) can be attributed to appreciation of the local currency. While appreciation of EM currency relative to other major currencies did push prices, these markets would have still outperformed all developed markets. This distinction is crucial since the performance of EM stocks appears to be organic while other foreign markets are largely a function of appreciating currencies, a dynamic that may or may not persist over time. U.S. stocks fared well in January with again of 5.73% while small-cap U.S. stocks increased by 2.61%. There has been a notable improvement in the performance of energy stocks following a weak 2017.Strength in this part of the market could help keep the overall stock market rising.
Global bonds did well in January with a gain of 1.19%; however, the entire gain can be attributed to increases in foreign currencies as the local currency version of the index fell -0.71%, which makes sense as global rates have increased over the month. In fact, the 10-year Treasury rate increased from 2.40% to 2.72%, resulting in a decline for U.S. bonds, which fell -1.15% in January. Credit held up nicely during the month with high-yield bonds and EM corporate bonds increasing by 0.60% and 0.66%, respectively.
As this is being written at the beginning of February, the Dow Jones Industrial Average is posting its worst decline in terms of points in history while nearly every major global market has declined by 4% or more. Additionally, the implied volatility (VIX) of the S&P 500 Index has increased by the largest margin ever. However, this rise is likely just a temporary condition, as there is very little reason for the market to shift into a bear market at this point. In fact, by the time this report is published, the stock drawdown might be a thing of the past. However, the sharp increase in stock volatility has masked a deeper problem. By February 5th, U.S. bonds experienced their worst drawdown in more than 20 years and, at times, were positively correlated with stocks, meaning that few asset classes provided any respite from the decline. Cash was the only safe harbor. This exact scenario was outlined in our January report card and investors should take note of this unusual situation. Investors can use this period as a blueprint for when the stock market really does change into a full-blown bear, but, as mentioned previously, we don’t believe that is the case right now. That can change, however, and it would be wise to keep an eye on cash as a type of exit door should the market start to sour.
Up until the last part of January and early February, the S&P 500 had reached its longest period in history without a 5% correction. This drought, combined with elevated levels of investor optimism, makes the market more vulnerable to a correction. When coupled with historically low volatility, the correction is likely to be quite unpredictable, especially by comparison to the relative quiet markets that preceded the drawdown. Despite this type of correction, it doesn’t necessarily mean a bear market is imminent. Typically bear markets are associated with weakening economic conditions, which is not the case today. Goldman Sachs recently published a study on this very topic and noted that corrections within a bull market can have a drawdown of 10%-20%, but typically last no more than four months. By comparison, bear markets historically have led to drawdowns of approximately 30% over a 13-month period. The good news: the global economy is strong, a bear market appears unlikely and the 10% pullback in the S&P 500 is in line with an average correction within a bull market.
The JPMorgan Global Purchasing Managers’ Index for January came in at 54.4 and has been rising since June of last year. Readings above 50 indicate a period of economic expansion. Additionally, more than 66% of global markets are trading above their 200-day moving average even after the February drawdown. As indexes reached new highs in January, there was strong breadth in most major markets. In short, we believe the recent pullback is likely a buying opportunity rather than the beginning of a bear market.
It turns out that elephants are very scared of bees. When they hear a beehive, they instinctually stomp their feet, flap their ears and kick up dirt. A single bee poses no risk to elephants, but bees can be dangerous when they swarm and attack soft spots around their trunk, eyes and mouth. Scientists are using this knowledge to help protect the endangered animal by having farmers put up beehives to ward off the large mammals. The method appears to be successful in warding off roughly 80% of elephants that wander onto farmland looking for a snack. As a result, there are less deadly confrontations between farmers and elephants.
Investing involves risk, including possible loss of principal. The value of any financial instruments or markets mentioned herein can fall as well as rise. Past performance does not guarantee future results.
This material is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer or solicitation with respect to the purchase or sale of any investment. Statistics, prices, estimates, forward-looking statements, and other information contained herein have been obtained from sources believed to be reliable, but no guarantee is given as to their accuracy or completeness. All expressions of opinion are subject to change without notice.
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Advance-decline line is a technical indicator that plots changes in the value of the advance-decline index over a certain time period.
Alerian MLP Infrastructure Index is the leading gauge of large- and mid-cap energy master limited partnerships (MLPs). The float-adjusted, capitalization-weighted index includes some of the most prominent companies and captures approximately 75% of available market capitalization.
Bloomberg Barclays EM Sovereign Bond Index is a rules-based market-value weighted index engineered to measure the fixed-rate local currency sovereign bonds issued in emerging markets as identified by Bloomberg.
Bloomberg Barclays Global Treasury ex-USD Index is an unmanaged index composed of those securities included in the Barclays Global Aggregate Bond Index that are Treasury securities, with the US excluded while hedging the currency back to the US dollar.
Bloomberg Barclays U.S. Aggregate Bond Index represents securities that are U.S. domestic, taxable and dollar denominated. The index covers the U.S. investment-grade, fixed-rate bond market, with index components for government and corporate securities, mortgage pass-through securities and asset-backed securities.
Bloomberg Barclays U.S. Corporate High-Yield Bond Index covers the USD-denominated, noninvestment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.
Bloomberg Barclays U.S. Credit Index is an index composed of corporate and non-corporate debt issues that are rated investment grade (Baa3/BBB) or higher.
Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks the mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA) and Freddie Mac (FHLMC).
Bloomberg Barclays U.S. Municipal Bond Index covers the USD-denominated, long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.
Bloomberg Barclays U.S. Municipal High Yield Index measures the noninvestment-grade and nonrated U.S. dollar-denominated, fixed-rate, tax-exempt bond market within the 50 United States and four other qualifying regions (Washington D.C., Puerto Rico, Guam and the Virgin Islands).
Bloomberg Barclays U.S. Treasury Index is an unmanaged index of public obligations of the U.S. Treasury with a remaining maturity of one year or more.
Bloomberg Barclays U.S. Treasury Bond 1-3 Year Term Index is an unmanaged index of public obligations of the U.S. Treasury includes public obligations of the U.S. Treasury with a maturity between 1 and up to (but not including) 3 years.
BofA Merrill Lynch U.S. Core Fixed Rate Preferred Stock Index consists of investment-grade, fixed and fixed-to-floating rate U.S. dollar-denominated preferred securities.
CBOE Volatility Index is a popular measure of market risk and is constructed using the implied volatility of S&P 500 index options.
Consumer Confidence Index (CCI) is a measure of consumer confidence, defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
Consumer price index (CPI) is an index number measuring the average price of consumer goods and services purchased by households. The percentage change in the CPI is a measure of inflation.
Credit Suisse Emerging Market Corporate Bond Index consists of U.S. dollar-denominated fixed-income issues from Latin America, Eastern Europe and Asia.
Dow Jones Global ex-U.S. Select REIT Index measures the performance of equity real estate investment trusts (REITs) and real estate operating companies (REOCs) traded globally, excluding the U.S.
Dow Jones U.S. Real Estate Index measures the performance of the real estate industry of the U.S. equity market.
Dow Jones Industrial Average (DIJA) is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry and are listed on the New York Stock Exchange.
JPMorgan Global Manufacturing Purchasing Managers’ Index is a composite index that serves as a global economic indicator by measuring different business conditions in 24 countries, including global manufacturing output, new orders and employment across the global manufacturing sector.
MSCI ACWI (All Country World Index) is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global developed and emerging markets.
MSCI EAFE (Europe, Australasia and Far East) Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
MSCI Emerging Markets Infrastructure Index captures the global opportunity set of companies that are owners or operators of infrastructure assets.
MSCI Japan Index is a free float-adjusted market capitalization index that is designed to measure the equity performance of 85% of Japan’s large- and mid-cap segments.
Max drawdown is the percentage of loss that an asset incurs from its peak net asset value to its lowest value.
NASDAQ-100 is a modified capitalization-weighted index that includes the largest nonfinancial U.S. and non-U.S. companies listed on the NASDAQ stock market across a variety of industries, such as retail, healthcare, telecommunications, wholesale trade, biotechnology and technology.
NYSE Advance/Decline Indicator is a technical indicator that charts the difference between the number of advancing stocks and declining stocks on the NYSE in a given market on a given day.
NYSE New Highs/Lows is a technical indicator that charts the highest and lowest prices over 52 weeks of NYSE stocks in a given market on a given day.
Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index. The Russell 3000 Index represents approximately 98% of the investable U.S. equity market.
S&P 500 Financials Index comprises those companies included in the S&P 500 that are classified as members of the GICS® financials sector.
S&P 500 Index is an unmanaged index of 500 common stocks chosen to reflect the industries in the U.S. economy.
Sharpe ratio is a ratio developed by Nobel laureate William F. Sharpe to measure how a fund performs relative to the risk it takes.
Standard deviation measures the degree to which a fund’s return varies from its previous returns or from the average of all similar funds.
U.S. Dollar Index is a measure of the value of the U.S. dollar relative to six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.
Valuation is the process of determining the value of an asset or company based on earnings and the market value of assets.
VIX (the ticker symbol for the Chicago Board Options Exchange Volatility Index) is a popular measure of market risk and is constructed using the implied volatility of S&P 500 index options.
Yield is the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost or on the U.S. government’s debt obligations.