March market breadth was positive across multiple asset classes. U.S. Equities were positive with the S&P 500 Index returning 1.94% and the MSCI EAFE Index also positive at 0.97%. Major fixed income asset classes were also positive during the month with the Bloomberg Barclays U.S. Aggregate Bond Index positive +1.92%. The Bloomberg Barclays U.S. Treasury Bond Index performed positively from the downward shift of rates across the yield curve, posting a 1.91% return. Corporate fixed income credits were also up, with Investment Grade and High Yield indexes returning 2.50% and 0.94%, respectively (as represented by the Bloomberg Barclays indexes).
Oil prices continued to rise in March as decreases in global production have helped to prop-up prices. With the U.S. Dollar Index up 0.72% versus a basket of foreign currencies, the precious metals index was down -2.19% while the industrial metals index was up 0.70% as trade discussions and the health of global economic growth continue to be debated. Agricultural commodities underperformed as the U.S. maintained its rhetoric of southern border security potentially impacting agricultural imports from southern countries.
Four of the eight hedge fund strategies were positive in March. Equity Hedge, Market Neutral, Merger Arbitrage and Global Macro strategies were positive while Relative Value strategies were negative. Among the Event-Driven strategies, Merger Arbitrage was positive and Event-Driven and Distressed strategies were negative.
U.S. fourth quarter GDP was adjusted to 2.2%, down from the earlier advanced figure of 2.6%. Personal Consumption figures were also down, 2.5% from 2.8%.
From a labor standpoint, payroll figures surprised on the downside when the change in non-farm payrolls was reported at 20,000, down from the prior 304,000 and far-off the survey estimate of 180,000. Unit Labor Costs rose by over a per-cent to 2.0% from 0.9%. While the Labor Force Participation Rate stayed firm at 63.2%, the underemployment rate dropped to 7.3% from 8.1% and the unemployment rate dropped to 3.8% from 4.0%.
While often cited as a measure of inflation, CPI is up 1.5% year-over-year while Core CPI (ex-Food & Energy) is up 2.1%. The Fed’s preferred measure of inflation, the PCE, showed a similar result with PCE up 1.4% and Core PCE up 1.8%.
The Conference Board Consumer Confidence IndexTM is 124.1, down from 131.4 from the prior report.
These figures may indicate some of the results of the late-cycle fiscal stimulus beginning to wear off. While labor seems to be tightening, inflation seems to be more muted with the PCE indicators below the Fed’s target level.
The Fed meeting for March 20 concluded with no increase in rates, which was in-line with their most recent dovish pivot. Rate hike expectations for 2019 has dropped to 0 from two. Further, the balance sheet reduction has been replaced with a tapering and then a stabilization of the $3.5T balance. In effect, the maintenance of rates and the balance sheet keeps the level of the monetary liquidity in place considering the softening economic conditions.
While equity markets have been performing positively year-to-date, the mixed signals coming from reported economic data, the Federal Reserve, and the election rhetoric that usually accompanies primary-election politics may generate uncertain risks in the near term.
By the close of March, the yield curve inverted with the 10-year yield falling just below the 6M, meaning the yield on a 6-month treasury bill was higher than a 10-year note. While it’s often cited that yield-curve inversions have preceded recessions, it doesn’t necessarily follow that yield-curve inversions cause recessions.
While the recent inversion has been attributed to the signs of a slowing economy and the recent reversal of the Fed’s stance on rate increases, U.S. employment levels remains robust and the U.S. economy is still relatively strong globally. Due to this, there is still some reason to believe overall consumption will help push GDP growth.
As the Fed has also signaled a slowing of rate hike increases, corporate credit markets have responded positively as overall credit risk from corporate leverage is reduced.
With various signals to weigh, investors should consider any pent-up volatility to inform their portfolio positioning.
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.
The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada.
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.
The U.S. Dollar Index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
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.
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 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 Core PCE Price Index is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends.
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.
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.
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.
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