Market IQ: Review and Outlook on the Markets

Insights

Market IQ: Review and Outlook on the Markets

DOUG SUE
Multi-Asset Strategist

FEBRUARY 04, 2019


Market Review

Equity markets rebounded in January, after one of the steepest monthly declines since the global financial crisis. U.S. equities had their best January performance in over thirty years, rising 8.0% despite a lackluster earnings period, where companies are currently beating expectations at one of the lowest rates in two years.  Emerging and developed market equities also rebounded in January - rising by 7.2% and 5.5%, respectively.

After an abysmal quarter, oil bounced back with an 18.5% gain. Positive catalysts were Venezuela sanctions, a drop in U.S. fuel stockpiles and dovish Fed forward guidance.  

The longest government shutdown in U.S. history, which lasted thirty-five days, came to a temporary resolution in January, allowing the government to reopen and providing House and Senate negotiators three weeks to reach a permanent deal. The Congressional Budget office estimates that the shutdown will result in a detraction of 0.4% from 1Q19 GDP.

US-China relations continued to dominate headlines, as the U.S. filed criminal charges against the Chinese tech giant Huawei and trade conversations with China’s delegation took place in Washington during the last week of the month. After the negotiations, President Trump expressed interest in meeting with President Xi during late February.  Chinese equities stayed resilient to trade war headlines and rose 11.2%.

At the end of the month, the Federal Reserve dovishly shifted its forward guidance, stating that it will be “patient” with raising rates going forward and is also open to adjusting the balance sheet normalization process. After the Fed voiced cautious comments around economic conditions, gold hit its eight month high.  U.S. government bond rates declined across the yield curve and the spread between 2-year and 10-year Treasury yields narrowed to 0.18%, where it sits below its longer-run average of 0.95%.

U.S. equity volatility, measured by the VIX index, ended the month at 16.6, a 34.8% drop compared to a month earlier. The historical average of the VIX is 19.3.

Short-Term Market Outlook

Our economic outlook weakened further at the end of January. A decline in global trade data and new orders inventory were the primary drivers of the drop. 

QS Leading Economic Indicator

Our assessment of leading indicators is the largest drag on our outlook of global stocks versus bonds, which marginally favors equities. Furthermore, valuation between the two asset classes, which has been a leading factor favoring equities in prior months has moderated recently. We believe that U.S. stocks are positioned to outperform international developed market equities. Price momentum, options market data and equity volatility support this conclusion. We believe that U.S. high yield is positioned to outperform U.S. investment grade, a sharp reversal from our forecast from the prior month. This position has changed due to two factors. Firstly, we observed spread compression between high yield and investment grade bonds — this is an indicator of stronger performance in high yield bonds. Secondly, high yield bonds typically perform well during times of declining equity volatility, which we observed occurring this month via the VIX Index as a proxy. European bonds are forecasted to outperform European stocks in our model. This position is mainly due to the weakness in European economic 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.

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.

QSCR18391 (February 2019)