EWM Macro View-January 2018

Domestic equity markets kicked off 2018 with a very strong January, as most stocks experienced gains, and the major equity indices reached new highs throughout the month. This was the best monthly return for the S&P 500 and Dow Jones Industrial Average (DJIA) since March 2016, and the best monthly return for the NASDAQ since October 2015. The DJIA surged above the 25,000 threshold for the first time ever during the first week of January, only to break through 26,000 on January 16, seven trading days later. Market participants continued to embrace the potential benefits from the Tax and Jobs Act of 2017, which provided lift to equities at year end and helped to kick-start 2018. The advance estimate of fourth-quarter gross domestic product (GDP) showed the US economy grew at a 2.6% annualized rate, which was slightly lower than expected and a dip from the two previous quarters that were both above 3%. Despite the slip in growth, the personal consumption component displayed a positive read, up 3.8%, leading many to look past the dip, as consumer spending drives roughly two-thirds of the economy. In the State of the Union address, President Trump urged Congress to pass a bill for $1.5 trillion in new infrastructure spending. Overall, we experienced many positive economic and market events to start the year.

 

Within this context, the S&P 500 gained 5.7%, despite closing the month with some selling pressure. The S&P 500 has now finished higher for 15 consecutive months on a total return basis. Large cap domestic stocks outperformed small cap equities, as the Russell 1000 Index was up 5.5% and the Russell 2000 gained 2.6%. Mid cap stocks trailed large cap as well, with the Russell Mid Cap Index gaining 3.8%. Growth stocks widely outperformed value stocks, with the Russell 3000 Growth Index returning 6.8% compared with 3.7% for the Russell 300 Value Index. In terms of sector performance, Consumer Discretionary was the strongest performer, gaining 9.3%, followed by Information Technology, which gained 7.6%. Utilities and Real Estate were the main laggards and the only two negative sectors, losing 3.1% and 1.9%, respectively. Over the last 12 months, the S&P Information Technology sector is up 43.1%, more than 1300 basis points ahead of the second-best performing S&P sector, Financials, which is up 29.8%. Broad-based commodities rose 2.0%, as energy prices surged and the dollar declined.

 

International equity markets posted strong results to start the year, with results mostly in line with large cap domestic stocks, as the MSCI ACWI ex-U.S. Index increased by 5.6% in January. International growth continued to show strength at the end of 2017, with the Eurozone posting GDP growth of 2.5% for the full year, which was above economists’ expectations, and its strongest reading since 2007. In December, the European Central Bank (ECB) lifted its growth estimate for 2018 to 2.3% from a previous estimate of 1.8%. The MSCI EAFE Index, which measures performance of international developed equities, gained 5.0%. Emerging markets continued to surge after a very strong 2017, gaining 8.3% in the first month of the year. EM Latin America and EM China were the top performers regionally, rising 13.2% and 12.5%, respectively. Regionally, Europe was a strong performer, increasing 5.4%, while Pacific ex-Japan posted a gain of 3.9%, trailing other regions.

 

Fixed income markets mostly traded lower for the month, as yields moved higher. The yield on the 10-Year Treasury Note surged higher on the month, increasing to 2.72% from 2.41% at year end, with the 31-basis points move higher reflecting the largest monthly increase since November 2016. The rise in yields has been widely expected to occur for over a year, as the Federal Reserve (Fed) has continued to shift rates higher at the lower end of the curve. Despite this expectation, the 10-year yield actually declined during 2017, even with three rate hikes. Shorter-term rates have been rising, but now the long end of the curve has caught up quickly. With expectations that the Fed, under the leadership of incoming Chair Jerome Powell, expects to increase rates three or four times in 2018, there is even greater likelihood that longer-term rates may trend higher as well. The Barclays U.S. Aggregate Bond Index declined by 1.2% for the month. Showcasing the benefit of diversification across fixed income, global bonds continued to outperform domestic fixed income, as the Barclays Global Aggregate ex-U.S. Index gained 3.0%. Similar to their taxable bond peers, municipal bonds posted slight losses, declining 1.2%. High yield fixed income produced stronger results relative to investment grade, gaining 0.6%.