Market IQ: Review and Outlook on the Markets April 2018

Insights

Market IQ: Review and Outlook on the Markets

DOUG SUE
Multi-Asset Strategist

JUNE 01, 2018

Global equity markets were up 0.9% during May; however, the regional equity performance underpinning this cumulative performance was quite varied. While U.S. equities were up 2.4% in the month, international-developed markets were down 0.5%.  With the USD appreciating strongly in the month (+2.1%), emerging market stocks were down 2.2%. 

Volatility in global commodity and equity markets was likely driven by political events and macro data. For instance, Italy and Spain both struggled through attempts to form new governments or oust current ones, causing their stock markets to drop over 9% and 6%, respectively.  Political drama in the United States seemed to have a greater impact outside of the United States than inwardly.  Trump pulled out of the Iran nuclear accord on May 8th.  This led to crude oil prices to continue to climb higher on fears that new sanctions against Iran would restrict the country’s ability to export oil.  Later in the month, the Trump administration announced it would put trade tariffs against China on hold. 

Early in the month, the U.S. Fed announced it would leave its policy unchanged, but continued pointing toward gradual rate hikes. In spite of this, on signs of U.S. economic strength, U.S. 10 year treasury yields reached 3.11% during the month – their highest level since 2011.  The overall U.S. investment grade bond market appreciated 0.4% in May while global fixed income declined 0.8%. 

Data supporting weakness in the U.S. 10 year treasury included payrolls rising by 223,000 in May (beating consensus estimates of 188,000), which pushed the U.S. unemployment rate to an 18-year low of 3.8%. Average hourly earnings rose 0.3%, translating into an annualized gain of 2.7%.  Earnings data also supported a strong overall economic backdrop as nearly 80% of companies that had reported Q1 results surpassed expectations.  Industrial production in the U.S. also increased in the month by 0.7%, which matched the gain announced in the prior month.

U.S. 10Y Treasury Yield - Last 10 Years


Source: Bloomberg

U.S. Unemployment Rate - Last 20 Years

 
Source: Bloomberg

Short-Term Market Outlook

Our economic outlook at the end of the month was at a one year low point, as exhibited by our Leading Indicator Index. This position was driven primarily by our measurement of global trade, which indicated a substantial slowdown.  Secondarily, our measurement of manufacturing data was also negative as was data on the average number of hours worked.  In turn, this negative sentiment lowered our expectation that stocks will outperform bonds – our relative preference between those assets was exactly neutral at month end.  Similar to our Leading Indicator Index level, this stock-bond position represented a 12-month low point in the forecast.  Our stock-bond forecast for European assets was in favor of bonds.  This model was impacted by the global stock-bond model referenced above but the preference for bonds was also driven by European leading indicators signaling economic contraction.  

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 Daily TR Gross EAFE USD Index; U.S. Equities represented by the S&P 500 Total Return Index; Japanese Equities represented by the MSCI Daily TR Gross Japan Local Index; Italy Equities represented by the MSCI Italy Index (MXIT index); Spain Equities represented by MSCI Spain Index (MXES 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; U.S. Treasuries represented by the Bloomberg Barclays U.S. Long Treasury USD.

QSCR 18159 (June 2018)