Market Monitor: February Update

Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.

Headlines and Highlights
  • S. stocks extend strong start to 2019 as most asset classes rise: Buoyed by the Federal Reserve’s rate-hike pause and progress toward resolving the trade war, the S&P 500 added more than 3 percent in February for the stock market’s best two-month start to a year since 1991. The gain wiped out December’s loss and left the index 5 percent short of its record high as the second-longest U.S. bull market approaches its 10-year anniversary on Saturday.
  • Trade war talks move closer to a deal: S. and Chinese negotiators are reported to be in the final stages of talks to resolve the nearly year-old tariffs stand-off between the world’s two largest economies. Under the latest terms being discussed, Beijing has offered to lower tariffs and other restrictions on U.S. farm, chemical, auto and other products while Washington is considering removing most if not all sanctions placed on Chinese products since last year. Significant hurdles remain before full agreement can be reached.
  • S. GDP finishes just short of 3 percent growth for 2018: The U.S. economy slowed modestly in the fourth quarter, growing at a 2.6 percent annual rate under pressure from a decline in consumer spending and the partial government shutdown. GDP, or gross domestic product, rose 2.9 percent for the full year – tying 2015 for the highest growth since 2005 behind a big boost from tax cuts and government spending increases.
Selected Market Returns

market monitor

Sources: Morningstar, Altair Advisers
Key Takeaways
  • Strong gains at the start of a year have historically been followed by further strength. We anticipate the same this year with further stock-market gains. The S&P 500 is up just 7 percent in the last 14 months. International stocks continue to have attractive valuations.
  • Small-cap and emerging-market stocks continue to have particularly positive outlooks in our view despite their recent gains. The price-to-earnings ratio for small caps based on the trailing 12 months (17.7) remains near multi-year lows, close to 2013 levels. Emerging markets (up 8.7 percent year-to-date through February) also are attractively valued and stand to benefit from both a U.S.-China settlement and any moderation in the dollar’s strength, which we think are likely.
  • The risk of an expanded U.S.-China trade war is contained for now and a deal between the two sides would provide a likely tailwind to markets. Reaching a broad, comprehensive agreement remains complicated, however, and markets are vulnerable to any negotiating setbacks.
  • The U.S. economy is projected to grow by less than 1 percent in the first quarter, according to the Federal Reserve Banks of both Atlanta and New York. The quarter’s weakness is due in part to the record government shutdown and the polar vortex that impacted regions of the US. Yet consumer confidence strengthened in February, the labor market remains strong, and we believe a recession remains unlikely this year.
  • Volatility has been noticeably reduced this year due largely to the Federal Reserve’s decision to keep interest rate increases on hold to support economic momentum. A resumption of rate hikes later this year would likely upset markets. That appears unlikely, however, based on both Chairman Jerome Powell’s recent pledge to remain data-dependent and the expectations of market traders, with the CME FedWatch Tool putting the possibility of a 2019 increase at less than 10 percent.

The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice