It was a good week for global stocks, jumpstarted by news of better-than-expected Purchasing Manager Index (PMI) numbers out of China. A strong U.S. jobs report helped too. There were 196,000 jobs added in March, up from 33,000 the month before, bringing the three-month average to 180,000. Wage growth came in at 3.2%, down slightly from the previous month, lessening fears of a wage-driven uptick in inflation. The unemployment rate stayed at a near-record low of 3.8%.
For the week, the S&P 500 climbed 2.2% while emerging markets equities were up 3.5%. Cyclical stocks led the rally, with materials up 4.3%, financials up 3.3%, and consumer discretionary up 3.2%. Defensive sectors struggled, with consumer staples down -1.0% and utilities giving up -0.2%.
This was the first week of 2019 when cyclicals outperformed defensive sectors, the type of rotation you would expect to occur if the market starts to upgrade its outlook on global growth, as we anticipate. The big global political and trade issues didn’t have much movement – still no solution to Brexit – but U.S.-China trade talks continued to give out positive signals. Yields on 10-year Treasuries rose to 2.5% during the week, eliminating the much-discussed yield curve inversion, at least for the time being.
Earnings season kicks off this week, with most sectors expected to show a year-over-year drop in the rate of earnings growth. (Healthcare, utilities, and real estate are the exceptions.) Earnings for the S&P 500 are expected to decline by just over 4%. But as we have stated previously, we believe 1Q may be the low point for the markets in 2019 as a modest recovery in global growth kicks in going forward. Investors will be listening closely to corporate earnings forecasts as they try to anticipate what the balance of the year may hold.
There continues to be a lot of talk about “late cycle” markets, but we are not so sure. True, the first quarter is likely to be light on both earnings and economic growth, but we believe this may represent a trough, with the global economy now showing signs of leveling off, and expectations for modest growth going forward.
GAIN: Active Asset Allocation
Counting Friday, the S&P 500 has been up for seven straight days, the first time this has happened since 2017. International and emerging stocks rallied as well, with the EURO STOXX 50 Index climbing +1.83% and Hong Kong’s Hang Seng Index jumping more than 4.0%. In Germany, the DAX was up 2.81%, reflecting in part the positive PMI number coming out of China and Germany’s exposure to global export markets.
PROTECT: Risk Assist
The rising market put a cap on volatility again, with the CBOE Volatility Index (VIX) closing out the week at 12.82, well off the 52-week high of 36.2. Treasuries were down as data was supportive of global growth, closing the week to yield 2.5%, up from 2.4% the week before. The Bloomberg Barclay’s U.S. Aggregate Bond Index fell -0.48%. High-yield bonds were up, with the ICE Bank of America U.S. High Yield Index climbing 0.6%.
SPEND: Real Spend
The one-year spread between global stocks and bonds evened out last week, with both up 4.5%. Domestically, U.S. stocks are handily outpacing bonds, up 10.7%. For the three-year period, global stocks were up 12.6% versus 1.8% for investment-grade bonds.
The bounce in Treasury yields resulted in some reshuffling among fixed income assets. The equity yield space broadly trailed with international dividend stocks and real estate investment trusts down slightly. Short-term bonds were flat.