Chutes and Ladders
- Equity markets continued to perform positively through April with the S&P 500 returning 4.05% and the Russell 2000 returning 3.41%. Year-to-date, large caps have outperformed small caps with lower volatility.
- International equities, while still negative year-to-date, have turned in positive performance in April with the MSCI EAFE up 2.81% and the MSCI EM up 2.11%.
- The U.S. yield curve remains inverted in the front-end of the curve with the curve steepening past the 2-year. Short-duration fixed income and credit were positive in the month while longer duration treasuries underperformed. Short duration treasuries were up 0.20% and intermediate and long-term treasuries were down -0.42% and -1.77%, as represented by the respective Bloomberg Barclays indexes.
- Credit spreads tightened during the month with investment grade and high yield CDS spreads tightening. Investment grade credit was up 0.61% while high yield credit was up 1.29%.
- While broad (spot) commodities were slightly negative for the month at -0.67% due to depressed levels for metals, livestock, and agricultural commodities, oil continues to perform positively as global inventory has been depressed and sanctions are in place on oil producing countries Venezuela and Iran. WTI Crude was up 5.47% in April.
- The dollar performed positively versus a broad basket of currencies, gaining on the EUR, GPB, and JPY cross.
- Of the eight main hedge fund strategies tracked, Global Macro returned the strongest return of 1.15%. Event-Driven and Merger Arbitrage strategies also performed positively at 0.47% and 0.08%. The Anadarko/Chevron announced deal kicked off one of the largest bidding wars within the energy sector over the last 4 years. Equity Market-Neutral strategies underperformed at -0.50%.
- The U.S. posted better than expected 1Q GDP figures reporting 3.2% versus the survey estimate of 2.3%. Personal consumption also surprised on the upside at 1.2% while the trade balance improved.
- Core inflation was up 0.1% month-over-month while headline inflation was up 0.4% month-over-month given high oil prices.
- The unemployment rate has stayed static at 3.8% and Non-farm Payrolls increased by 196,000.
- Housing starts dipped down by -0.3% to 1,139K from 1,162K. Similarly, existing home sales also dropped, falling by -4.9% to 5.21M from 5.51M. New home sales, however, was positive by 4.5% rising to 692K from 667K.
- Consumer confidence improved to 129.2 from 124.1.
- With relatively flat inflation, the Fed met at the end of the month and held the Fed Funds Rate at the current level. The Fed continues to telegraph a patient path regarding its rate increase schedule and balance sheet run-off.
- In Europe, the European Central Bank maintains its stance on loose monetary policy as Eurozone inflation looks to grab a foothold.
- The Bank of Japan reiterates its intention to continue its current rate of monetary stimulus.
Chutes and Ladders…
The S&P 500 reached its all-time closing high of 2,945.83 on April 30, 2019. The view from the top can be nice, it’s also a long way down. With measures of asset class performance favorable, a better than expected Q1 GDP growth figure reported, strong employment figures, and improved consumer confidence, optimism seems to be pricing into the market.
In the backdrop of all this, the Fed is still dealing with soft inflation. The Fed meeting at the end of the month left rates unchanged as trade discussions remain ongoing, and we may be near the end of the road for the tariff “can” if a final agreement can’t be reached. By the end of April, conversations between administration officials and China still did not reach an agreement with the impasse resulting in how much of the $250B in tariffs would be removed.
Tariffs on Chinese imports may result in inflation, but for the wrong reasons. As the Fed continues to monitor the core drivers of employment and consumer expenditures, it seems the probability of rate hikes has given way to possible rate cuts.
Although potential event risk (good or bad) could only be a tweet away, the relatively low VIX has provided a feeling of relative calm; however, alternative measures of risk provide a divergent view with the CBOE SKEW Index rising 4.56% in April and the CBOE Put/Call Ratio Index also increasing by 20.72%.
As we enter the election cycle the idea of a “Trump put” has entered the conversation given the President’s use of the market as validation of his policies. We also have the “Powell put” in play with the Central Bank in a position to inject monetary stimulus or the “Xi put” in case Chinese growth falls below 6% due to the fall-out from the Trade talks.
As the market moves past its 4th consecutive positive month after reaching the apex of the S&P 500 on April 30, contrarians may see this as a chance to manage risk while bulls are looking onward and upward.
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 MSCI EM Index
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.
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.
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 U.S. Fed Funds Rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis.
The European Central Bank (ECB) is the central bank of the 19 European Union countries which have adopted the euro.
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 VIX or the CBOE Volatility Index is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options.
The CBOE SKEW Index is a measure of potential risk in financial markets. Much like the VIX index, the SKEW index can be a proxy for investor sentiment and volatility. The Skew Index measures perceived tail-risk in the S&P 500. Tail-risk is a change in the price of the S&P 500 or a stock that would place it on either of the tail ends, or the far edges of the normal distribution curve. These price changes typically have a low probability.
The CBOE Put/Call Ratio Index is used an indicator of future market direction.
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