Deal or No Deal?
Markets in February rewarded risk assets with the S&P 500 Index posting another positive monthly return of 3.21%. Fixed Income was also positive, with investment grade rising 0.22% and high yield credit coming in higher at 1.66% (as represented by the Bloomberg Barclays indexes). Credit spreads tightening offered a tail-wind for credit risk, while the yield curve shifted upward causing duration assets to fall. U.S. Treasuries dropped -0.27%, as shown by the Barclays U.S. Treasury Bond Index.
The Bloomberg Commodity Spot Index was up 0.82%. With the price of oil up for the second month in a row following decreased OPEC production and sanctions against Venezuela and Iran, supply and demand forces are taking hold to influence oil prices upward. The Gold/Copper ratio decreased in February with the increase in Copper prices (Industrial Metals) relative to Gold (defensive) while soft commodities were down as U.S. agricultural products have been in the cross-fire during the tariff wars.
Five of the eight hedge fund strategies were positive in February. Among the Equity Hedge strategies, Equity Hedge was positive 1.16% while Equity Market Neutral was negative -1.42%. Two of the three Event Driven strategies were negative, with Event Driven and Merger Arbitrage down -0.18% and -2.99% respectively but Distressed was up 0.04%. Global Macro was positive 0.76% and Relative Value and Convertible Arbitrage were up 0.30% and 0.48% respectively.
The Fed back peddled on its more hawkish language from December to soften its stance on both rate hikes and balance sheet normalization. While the President has continued to criticize the Fed as being too aggressive as it relates to rate increases, this more dovish tone may signal a more alarming concern that the economic recovery isn’t as robust as originally believed given the softer inflation signals and signs of slack in the labor market. With rates remaining low, and the Fed looking to maintain a targeted balance sheet level, monetary stimulus remains in the system.
While February YoY Core CPI came in at 2.2%, the Fed’s preferred measure of inflation, the Personal Consumption Expenditure (PCE) Index current PCE figure of 1.9% (from Q4 2018 and next release on March 29) is still below the Fed target level. The unemployment rate nudging upward to 4% and Labor Force Participation ticking up to 63.2% are indicating some signs of slack in the labor market. Jobless claims have been rising above the survey estimates while the change in Non-Farm Payrolls was reported above the survey estimate but below the prior reported level.
Fourth quarter advanced GDP was released at 2.6%, down from the recent 3rd quarter final GDP of 3.4%. This apparent slowdown has challenged the notion of the expanding economy; however, the YoY GDP figure is still slightly higher than the previous quarter. The Retail Sales Advance MoM is down -1.2% while Retail Inventories are up 0.9% MoM.
Deal or No Deal?
February began with certain unknowns. Would the government shut down on the 15th when short term funding expired? Would trade negotiations with China avert the March 1 tariff deadline? What would be accomplished in the North Korea–United States Hanoi Summit? Will Brexit negotiations result in a hard or soft exit?
As the month progressed, we learned the Government shut-down would be averted as Congress passed, and the President signed, a $333B spending package. With the government open, the President followed through on the declaration of a National Emergency to fund the border wall that had been at the center of the shutdown debate.
U.S.-China trade negotiations occurred throughout the month with telegraphed signals that discussions were progressing positively. Markets reacted in kind as the threat of the March 1 tariff deadline was extended to allow both countries to continue the negations. China has proposed such concessions as increasing its agricultural purchases by an additional $30B per year.
As the March 29 deadline approaches, Prime Minister May proposed a Parliament vote to delay Brexit. While this extension would provide additional time for negotiation, the lack of any consensus at this late stage seems to signal a delay of the inevitable.
Key Economic Data:
- The U.S. Bureau of Economic Analysis (BEA) fourth quarter Advanced 2018 GDP was 2.6%. Real GDP grew by 3.4% in the third quarter of 2018, 4.2% in the second quarter of 2018, and 2.0% in the first quarter of 2018.
- Headline inflation (U.S. Consumer Price Index for All Urban Consumers seasonally adjusted (CPI-U SA)) was at 0.0%. Core inflation (CPI-Ex Food and Energy) came in at 0.2%. For the last 12 months, the CPI-U NSA was 1.6% and the CPI-Ex Food and Energy was 2.2%.
- The U.S. Bureau of Labor Statistics (U.S. BLS) announced that non-farm payrolls changed by 304,000 compared to the prior change of 312,000. Private sector payroll employment changed by 296,000 compared to 301,000 from the prior period. The unemployment rate increased 0.1% to 4.0%. The underemployment rate increased to 8.1% from 7.6%. The labor force participation rate increased 0.1% to 63.2%.
- The U.S. Department of Housing and Urban Development (HUD) announced Existing Home Sales were at 4.94M, down -1.2% from the prior month. Pending Home Sales are up 4.6% while Housing Starts have dropped -11.2%.
- The Conference Board Consumer Confidence IndexTM is 131.4, up from 120.2 from the prior report.
Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value.
This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.
The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.
This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.
The S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
U.S. Treasuries are backed by the full faith and credit of the United States government as to payment of principal and interest if held to maturity.
The Bloomberg Barclays U.S. Corporate Investment Grade Credit Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.
The Bloomberg Barclays U.S. Corporate High Yield Credit Index measures the USD-denominated, high yield, fixed-rate 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. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded.
A yield curve is a curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity.
A credit spread is the difference in yield between two bonds of similar maturity, but different credit quality.
The Bloomberg Barclays U.S. Treasury Bond Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index.
OPEC, the Organization of the Petroleum Exporting Countries, is an intergovernmental organization of 15 nations, founded in 1960 in Baghdad by the first five members, and headquartered since 1965 in Vienna, Austria.
The HFR Equity Hedge Index measures strategies that buys stocks that are undervalued and short sells stocks that are overvalued. This strategy may commonly employ variable exposure as well as the use of leverage.
The HFR Equity Market Neutral Index measures strategies that employ sophisticated quantitative techniques of analyzing price data to ascertain information about future price movement and relationships between securities, select securities for purchase and sale.
The HFR Event Driven Index measures strategies that are designed to capture price movement generated by a significant pending corporate event, such as a merger, corporate restructuring, liquidation, bankruptcy, or reorganization.
The HFR Distressed/Restructuring Index measures strategies which employ an investment process focused on corporate fixed income instruments, primarily on corporate credit instruments of companies trading at significant discounts to their value at issuance or obliged (par value) at maturity as a result of either formal bankruptcy proceeding or financial market perception of near term proceedings.
The HFR Merger Arbitrage Index measures strategies which employ an investment process primarily focused on opportunities in equity and equity related instruments of companies which are currently engaged in a corporate transaction.
The HFR Macro Index measures strategies that base holdings, such as long and short positions in various equity, fixed-income, currency, commodities, and futures markets, primarily on the overall economic and political views of various countries, or their macroeconomic principles.
The HFR Relative Value Index measures strategies that seeks to take advantage of price differentials between related financial instruments, such as stocks and bonds, by simultaneously buying and selling the different securities—thereby allowing investors to potentially profit from the “relative value” of the two securities.
The HFR Convertible Arbitrage Index measures strategies often employed by hedge funds that involve the simultaneous purchase of convertible securities and the short sale of the same issuer’s common stock.
The Consumer Price Index for All Urban Consumers (CPI-U) measures the changes in the price of a basket of goods and services purchased by urban consumers.
The Consumer Price Index for All Urban Consumers Ex Food and Energy (Core CPI) is an aggregate of prices paid by urban consumers for a typical basket of goods, excluding food and energy, is widely used by economists because food and energy have very volatile prices.
The Consumer Board U.S. Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence, which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending.
The Personal Consumption Expenditure (PCE) Index is one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy. Of all the measures of consumer price inflation, the PCEPI includes the broadest set of goods and services.
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