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Wall Street to Your Street


Q1 2019 Market Recap: Stocks Move Up and Yields Slide as Fed Eases Policy

The S&P 500® moved up for the third straight month in March, with a 1.79% gain, following a 2.97% gain in February and a 7.87% increase in January.

Image 1

In the bond market, the Federal Reserve (Fed) left rates unchanged at its March 19-20 board meeting and signaled that rates may not be raised at all in 2019.

Combined with rising market demand for government bonds amidst global economic concerns, the Fed policy shift helped drive bond prices up and yields down. The yield on 10-year U.S. Treasuries slipped to under 2.35% in late March, its lowest level since 2017, and closed the month at 2.42%.

Through the first quarter of 2019, 10-year Treasury yields have dropped 0.26% from 2.68% at the close of 2018.

Exhibit 1

Here are some other recent economic highlights, which are covered in greater detail later in this report (Exhibit 1):

  • Retail sales inch up. Retail sales for January were up 0.2% from the previous month and up 2.3% from a year earlier, according to the U.S. Department of Commerce.
  • Job growth slows. The economy added only 20,000 new jobs in February, but the unemployment rate dropped 0.2% to 3.8%, according to the U.S. Department of Labor.
  • Oil prices keep climbing. Oil prices continued to rebound in March for the third straight month.

Drilling Down

Exhibit 2

U.S. Stocks Stay Positive

The S&P 500 moved up 1.79% in March, from 2,784.49 at the end of February to 2,834.40 at the March close (Exhibit 2). The index is up 13.07% through the first quarter of 2019. (The S&P 500 Index is a market-cap-weighted index that represents the average performance of a group of 500 large-capitalization stocks.)

The total return of the S&P 500 (including dividends) was 1.94% in March and 13.65% for the first quarter.

The NASDAQ Index was up 2.61% in March, from 7,532.53 at the end of February to 7,729.32 at the March close. It is up 16.49% for the year. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail Sales Tick Up

Retail sales for January were up 0.2% from the previous month and up 2.3% from a year earlier, according to the advance monthly retail sales report issued March 11 by the U.S. Department of Commerce.

Motor vehicle sales were down 2.4% from the previous month, but up 0.2% from a year earlier, while clothing and accessories were down 1.3% from the previous month, but up 1.6% from a year earlier.

The building materials and garden equipment category was up 3.3% for the month and up 8.7% from a year earlier. Non-store retailers (primarily online) were up 2.6% from the previous month and up 7.3% from a year earlier.

Exhibit 3

Jobs Growth Slides

U.S. employers added only 20,000 new jobs in February after adding 311,000 jobs in January, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued March 8. However, the unemployment rate declined 0.2% from 4.0% to 3.8%, as the number of unemployed persons decreased by 300,000.

Average hourly earnings increased by $0.11 to $27.66.

Sectors Mixed

Exhibit 4

The S&P 500 Real Estate, Information Technology and Utilities sectors all had strong gains in March, while Financials and Industrials moved lower.

For the first quarter, Information Technology and Real Estate led the way. All 11 sectors were positive for the quarter.

Exhibit 3 shows the results of the 11 sectors for the past month and the first quarter of 2019.

Treasury Yields Decline

Exhibit 5

The yield on 10-year U.S. Treasuries ended March at 2.42%, down 0.29% from the 2.71% rate at the end of February (Exhibit 4). Through the first quarter, the yield was down 0.26% from the 2.68% yield at the end of 2018.

Corporate Earnings Growth Stalls

After strong corporate earnings growth throughout 2018, earnings stalled in the first quarter of 2019, as 12-month forward earnings per aggregate share of the S&P 500 Exhibit 6dipped 0.64% from the 2018 year-end estimates (Exhibit 5).

The forward price-earnings ratio (P/E) of the S&P 500 increased in the first quarter, as stock prices moved up and projected earnings declined (Exhibit 6). The P/E closed the quarter at 16.44, well above the 14.41 P/E at the close of 2018 (which was the lowest level since 2014).

The forward 12 months earnings yield for the S&P 500, which is the inverse of the P/E, ended the first quarter at 6.10%,Exhibit 7 well below the 6.94% yield at the close of 2018 (Exhibit 7). The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The S&P 500 earnings yield is still significantly higher than the 2.42% rate of 10-year U.S. Treasuries.

Dollar Strengthens versus Both Euro and Yen

The U.S. dollar was up 1.78% versus the Euro through the first quarter of 2019Exhibit 8 (Exhibit 8).

The dollar advanced 0.88% versus the Yen through the first quarter (Exhibit 9).

Oil Prices Keep Climbing

Oil continued to rebound in March, extending its rally for the third straight month after experiencing a decline of nearly 40% in the fourth quarter of 2018 (Exhibit 10).Exhibit 9 The price of a barrel of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, climbed 5.10% for the month, from $57.22 at the February close to $60.14 at the March close.

The price of oil has surged by 32.44% through the first quarter of 2019 after closing 2018 at $45.41 per barrel.

Gold Rising

Exhibit 10

Gold prices moved up 1.34% in the first quarter, from $1,283.00 at the close of 2018 to $1,298.50 at the March close (Exhibit 11).

International Equities Turn Positive

The international markets have had a strong start to the year. The MSCI EAFE Index, which tracks the performance of developed-economy stocks in Europe, Asia and Australia, was up 9.04% through the first quarter (Exhibit 12). It was up 0.09% in March.

Exhibit 12Exhibit 11

What’s ahead for the economy and the markets? See Second Quarter Market Outlook: Assessing the Impact of Slowing Earnings Growth and the Fed Rate Pause by David Francis, CFA, Head of Equity

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