Market Update - February 25, 2019Submitted by Jodi Vleck , Beta Wealth Group on February 25th, 2019
For the holiday shortened week ended February 22, U.S. stocks gained ground, driven by a possible favorable resolution of the US-China trade spat (Over the weekend, it was announced that the March 1st tariff imposition deadline date would be extended as talks continue, suggesting optimism about resolution), positive earnings reports from the likes of Wal-Mart which are often viewed as a proxy for the strength of the U.S. consumer, and releases of FOMC minutes that seemed to cement their 'patient' approach with respect to future policy and general dovishness.
From a sector standpoint, yield-oriented sectors such as Utilities, Telecom and Materials led the way, while the energy and health care sectors lagged, with healthcare being dragged down due to renewed bipartisan efforts to rein in drug prices. On the economic front, improvements in jobless claims data and homebuilder sentiment were offset by weaker durable goods orders, lower existing home sales and a flattening index of leading economic indicators.
With earnings results for nearly 90% of the S&P 500 now in, over 70% have reported positive earnings surprises, equating to a year-over-year earnings growth rate of just over 13% as per FactSet. However, profit margins appear to have peaked in Q3 of last year and are now back on a downward trend, suggesting expectations for an actual Q1 earnings decline on a year-over-year basis, partly due to a tough Q1 comparison from last year. While this has brought the 12-month forward P/E on the S&P 500 index to 16x, which is close to historical averages, the setup remains for potential positive earnings growth especially in 2H2019.
Foreign developed markets generally performed in line with U.S. equities, with similar returns seen across Europe, the U.K. and Japan, while emerging markets outperformed noticeably, led by China and its neighors, on the back of optimism about favorable trade negotiations.
Bond returns were flattish overall, as the yield curve was little changed, with long treasuries experiencing minor declines while higher-yielding segments such as high yield and bank loans outperformed. Assisted in part by a slightly weaker dollar, foreign debt outperformed U.S. debt both across developed and emerging markets. Real estate markets appreciated in line with broader equity markets, led by cyclically-sensitive lodging/resorts companies and Foreign Real Estate Investment Trusts (REITs), while domestic healthcare REITs lagged. Commodities gained overall, featuring sharply higher prices for natural gas due partly to weather-related impact and increases in the price of West Texas crude to just over $57/barrel driven partly by positive sentiment about a favorable US-China trade resolution.