Market IQ: Review and Outlook on the Markets

Insights

Market IQ: Review and Outlook on the Markets

DOUG SUE
Multi-Asset Strategist

APRIL 08, 2019


March 2019

Global equity markets continued to rally in March, with the major equity regions exhibiting positive performance.  U.S. large cap stocks appreciated 1.9% and finished the quarter with one of the strongest performances in the past decade.  International developed and emerging markets also continued to exhibit positive price momentum – rising by 1.5% and 1.4%, respectively.

Oil rallied 5.1% on tighter supply conditions globally.  This originated from a surprise drawdown in crude inventories, Saudi Arabia’s energy minister affirming their commitment to cutting oil output and power outages in Venezuela which restricted port loadings and crude production.

The USD rose a modest 0.7% in March, with softer economic data as a headwind - non-farm payrolls, The Consumer Price Index and industrial production all missed on expectations.  However, weakness in data across the other major G10 currencies provided support for the USD.  The British Pound was the worst performing G10 currency against the US Dollar following negative developments with the Brexit negotiations.

The 3M-10Y U.S. yield curve spread inverted at the end of the month, with the ten-year yield dropping to a recent low of 2.4%.  The Federal Reserve surprised the market, providing downward revisions to their rate hike expectations to zero in 2019 and one in 2020.  The Federal Reserve also announced a sooner than expected end to their quantitative tightening program.

U.S. equity volatility, as measured by the VIX index, continued its downward trend and ended the month at 13.7. This marked a 7.2% drop versus February’s month-end level and was far below the index’s long-term average of 19.3. 

Uncertainty around U.S.-China trade negotiations continued over the month.  US Trade Representative Lighthizer commented that a trade deal with China remained a “big if”, and Bloomberg reported that there could be a delay in trade talks until June. However, stimulus from the Chinese authorities and a positive manufacturing PMI reading led to the Chinese stock market rising 2.4%.

Source: Bloomberg*

Short-Term Market Outlook

Our economic outlook remains negative versus last month driven by average hours worked, new orders inventory and new building permits.

QS Leading Economic Indicator

We continue to believe that U.S. stocks are positioned to outperform U.S. bonds as well as international developed market equities. Our preference for U.S. equities is supported by options market data (which shows greater demand for puts in international-developed markets than in the U.S.), better price momentum in the U.S. and yield curve steepness. Despite the fact that one measure of the U.S. yield curve inverted in March, our model observed that yield curves in other developed markets are flattening faster than in the U.S. market.

We continue to believe that U.S. high yield is positioned to outperform U.S. investment grade. However, this position has moderated due to spread widening between high yield and investment grade bonds — this is an indicator of stronger performance in investment grade bonds.

European stocks are forecasted to outperform European bonds in our model. Our conviction in this position has increased over the past month due to improvements in the European Leading Indicator index and our U.S. stocks versus bonds signal, which itself was impacted by global trade data, average hours worked and initial unemployment claims.

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.

IMPORTANT INFORMATION
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.


*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; 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.

QSCR18454 (April 2019)