December 2019 Market Commentary
In December, global equity markets rallied for the fourth month in a row. Within the U.S., equity markets reached all-time highs and large cap marginally outperformed small cap, rising +3.0% versus +2.9%. U.S. equity volatility, as measured by the VIX Index, increased +9.2% to 13.8 – this level is substantially below its long term average of 19.2. Abroad, emerging markets significantly outperformed developed stocks, rising +5.8% versus +1.4%.
The USD declined -2.0% during the month and was the worst performer out of the G10 currencies. The USD was weighed down by a more dovish Fed, progress on the U.S. and China “phase one” trade deal and weakness in domestic economic data. Progress on the “phase one” trade deal boosted risk-on sentiment, leading safe haven currencies like the USD to decline. U.S. ISM manufacturing data declined to 48.1 versus a 49.2 expectation.
The U.S. ten-year yield seesawed during December, as it initially fell to 1.7% after the U.S. manufacturing sector gauge showed a contraction. The ten-year yield rebounded from a strong U.S. jobs reading; U.S. non-farm payrolls data showed an increase of 266k versus the 180k forecast. The ten-year yield rose fourteen basis points over the month and ended at 1.9%, the highest end of month reading since July.
The price of crude oil rose +10.7% on the back of reduced supply and improving global demand. Crude oil was supported by OPEC and Russia agreeing to cut oil production and by a larger amount than the market had anitcipated. Additionally, U.S. inventory fell by a larger amount than forecasted.
In the U.K., the GBP rose +2.5% against the USD. Boris Johnson’s conservative party won the general election, which led the GBP to initially rally. Economic data out of the U.K. was mixed during the month, as weakness came from manufacturing data and retail sales both contracting. However, the labor market data did beat expectations and Q3 GDP was revised up to +0.4% quarter over quarter from +0.3%. The U.K. ten-year Gilts yield ended the month at 0.8%.
Short-Term Market Outlook
Our proprietary leading economic indicator declined significantly month-over-month and has shifted to very negative territory. This was driven by a decline in global trade.
QS Leading Economic Indicator
Our outlook for U.S. stocks versus investment grade bonds is currently in neutral territory, compared to a preference for U.S. stocks last month. The decline in the strength of the signal was driven by the decline in the QS leading economic indicator and a rise in the ten-year yield.
In U.S. fixed income, we forecast that high yield will outperform investment grade bonds over the near term. Within the model, the narrowing of the spread between high yield and investment grade more than offset the rise in equity volatility.
We believe that U.S. stocks are positioned to underperform versus their international-developed market counterparts. This view is supported by valuation, which compares the forward price to earnings ratio in the U.S. versus their international counterparts. Options market data also shows greater demand for price protection in the U.S. versus international-developed markets. The options market data supporting international-developed markets is at its strongest level in several years.
European stocks are forecasted to perform similarly to European bonds in our model. Valuation, as measured by comparing European equities earnings yield to the ten-year government yield, and equity price momentum continues to support stocks. Bonds are supported by the recent change in European government yields and a negative reading of European Leading Indicators.
Asset Class Preferences
Asset Class Preferences are based on QS Investors proprietary quantitative factor models. These rules-based financial models use a combination of indicators that analyze asset valuations, investor sentiment, and the broad economy.
*Global Equities represented by the MSCI ACWI Gross Total Return Local Index; Emerging Market Equities represented by the MSCI EM Gross Total Return Local Index; International Equities represented by the MSCI EAFE Gross Total Return Local Index; U.S. Equities represented by the S&P 500 Total Return Index; U.S. Small Cap Equities represented by Russell 2000 Total Return Index; European Equities represented by MSCI Europe Gross Total Return Local Index; Italy Equities represented by MSCI Italy Index (MXIT Index); Spain Equities represented by MSCI Spain Index (MXES Index); Greece Equities represented by MSCI Greece Index (MXGR Index). China Equities represented by MSCI China Net Total Return Local Index; U.S. Dollar (USD)represented by the Bloomberg Dollar Spot Index; Global Fixed Income represented by the Bloomberg Barclays Global Agg Total Return Index Value Unhedged USD; U.S. Fixed Income represented by the Bloomberg Barclays U.S. Agg Total Return Index Value Unhedged USD; Emerging Market Fixed Income represented by J.P. Morgan EMBI Global Core USD Index.
This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or QS Investors, LLC to enter into or arrange any type of transaction as a consequence of any information contained herein. QS Investors, LLC does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of QS Investors, LLC, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute QS Investors’ judgment at the time of issue and are subject to change. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. This document is only for professional investors. Investments are subject to risks, including possible loss of principal amount invested.
QSCR-18968 (January 2020)