By Pete Biebel, Senior Vice PresidentPrint This Post
Last week brought a fairly quiet ending to a relatively raucous quarter. Despite a bearish conclusion in the prior week, the major averages all racked up gains of about 1% to 1 ½% last week. It was a fine ending to a fantastic quarter. Year-to-date, the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) are up about 11% and 13% respectively. The NASDAQ Composite Index (COMP) gained about 16 ½% through the first three months of the year. It was the best start of a year for SPX since 1998. It was the best quarter for U.S. stocks since 2009 and the best quarter for world stocks since 2012. All eleven S&P sectors had net gains for the quarter for the first time since 2014.
Recent history has shown that a big rebound quarter typically follows the rare bad quarters. A Wall Street Journal article on Friday included a chart of the S&P’s quarterly returns for the past ten years. Over that time, there were only four quarters (including Q4 2018) that experienced losses of more than 5%. The chart shows that in all four cases, the subsequent quarter enjoyed a snap-back gain nearly equal to the previous quarter’s loss.
In what is probably a pretty rare feat, more than 92% of the SPX stocks ended with net gains for the quarter. Both DJIA and the NASDAQ 100 Index came through the quarter with 90% of their components in the plus column. The laggard among the major averages was the Russell 2000 Index of small-cap stocks (RUT). RUT tacked on a little over 14% year-to-date, but about 25% of its component stocks had net losses for the quarter.
In addition to equity markets, almost everything else had a positive quarter. Most fixed-income sectors and most major currencies had net gains over the last three months. Even several commodity sectors were positive for the quarter. Gold has been weak recently but squeaked out a narrow net gain for the year through March. Silver and Agricultural Commodities had small net losses for the quarter. And, the euro currency ended March about 2% below where it ended December.
The early gains in the quarter came from a steep snap-back rally out of the extremely oversold levels of late-December. A suddenly much more dovish Federal Reserve Board helped to keep the party going as traders’ expectations for lower rates for a longer time outweighed the risks of a slowing economy. More recently, hopes for a speedy end to the continuing threat of a trade war with China have added to the bullishness in our markets.
The Technology sector, which tumbled nearly 25% from its October high into its December low, was the best performing sector through the first three months of the year with a gain of nearly 20%. Sixteen of the sector’s 68 component stocks enjoyed net gains of more than 30% year-to-date, though none of the top ten weighted stocks in the sector were among those top performers. The top ten weighted names in the Technology sector posted respectable gains of 15% to 26% over the past three months.
A closely related subset of the Technology sector is a group of internet companies that were the market leaders through the first half of last year. The NYSE FANG Plus Index of ten such companies peaked last June, then lost a little over 26% to its December low. That index is up about 18% through the first three months of 2019.
The Real Estate sector was up nearly 17% to narrowly edged out Industrials for the second-best sector gain in the quarter. All 32 of the stocks in that sector are higher year-to-date with eight of them posting gains of more than 20%, including three of the most heavily weighted names in the group. Real Estate, along with Utilities (with a year-to-date gain of about 10%), are the only sectors that reached new highs in the quarter. Those performances were no doubt aided by the steady trend lower in interest rates. The yield on Ten-Year Treasuries has fallen from about 3.2% in early-November to its lowest level in more than a year near 2.4% as of last Friday.
These articles have pointed to the deterioration in the Healthcare sector over the past month or two. It is the poorest performer of the U.S. equity sectors year-to-date with a gain of just over 6%, and that’s after being one of the best groups in the second half of 2018. Healthcare was the last of the U.S. equity sectors to make a new high before the market sell-off in late-2018. The sector peaked in late-November and lost a relatively minor 16% into its December low. The group rebounded nicely with the rest of the market through the first two months of the year, but it was unable to exceed its February high at any point in March. Healthcare’s recent lack of vitality is likely a symptom of a similar and cotemporaneous lethargy in both Biotech and Pharmaceutical stocks. The S&P Healthcare Sector Index held at its 200-day moving average several times at last week’s lows, so there’s still hope for a recovery. However, taking out those lows would likely lead to sustained trading below the 200-day, which would extend the group’s underperforming phase.
One sector that seems to be coming out of its funk is Consumer Staples. Staples trailed most other sectors through 2018. When the major indices and several other sectors were making new highs in late-summer, the rally in Staples fell short of its January 2018 high. That sector only lost about 15% in the fourth-quarter sell-off but it has only gained about 10.5% year-to-date. In recent weeks, however, the sector has been looking much more promising. It was one of only four of the eleven S&P sectors that managed to trade above the prior week’s high last week. Even better is that several of the big-name stocks in the sector are acting much better.
These are the slow-growth sort of stocks that were out of favor last year. They all made multi-year lows during 2018. For the most part, they have solid balance sheets, attractive dividends and cheap valuations. Many of these dull, old names have been making good forward progress over the past several weeks.
SPX ended last week just above 2834, just 0.73% below its rebound high set in the prior week. The coast is clear for SPX to move beyond that level. The lows of the past two weeks were in the mid-to-upper-2780s. Taking out those levels would likely lead to a test of the 50-day and 200-day moving averages in the 2756 area.
Investors this week will be monitoring trade discussions as the most likely catalyst that could swing markets. U.S. and Chinese officials are scheduled to meet in Washington. Retail sales figures today, Durable Goods data tomorrow and the end of the week employment data are the reports most likely to shift expectations for U.S. growth.
|Monday 4/1/2019||Retail Sales, M/M||+0.2%||+0.3%|
|Retail Sales, less Autos & Gas, M/M||+1.2%||+0.4%|
|PMI Manufacturing Index||53.0||52.5|
|ISM Manufacturing Index||54.2||54.0|
|Construction Spending, M/M||+1.3%||-0.1%|
|Tuesday 4/2/2019||Durable Goods Orders, M/M||+0.4%||-1.9%|
|Durable Goods Orders, ex-Transportation, M/M||-0.1%||0.0%|
|Wednesday 4/3/2019||ADP Employment Report||+183K||160K|
|PMI Services Index||56.0||54.8|
|ISM Non-Manufacturing Index||59.7||58.0|
|Thursday 4/4/2019||Initial Unemployment Claims||211K||216K|
|Friday 4/5/2019||Employment Situation, Non-Farm Payrolls, M/M||+20K||+169K|
|Average Hourly Earnings, M/M||+0.4%||+0.2%|
Links to previously published commentaries can be found at benjaminfedwards.com/Company News/Blog/Market