Please find the next blog in our monthly series that provides timely market data as well as perspectives on the current state of the economy and the global financial markets.
Uncertainty over trade and instability in the Trump White House were the themes of the month, causing most equity markets to move lower. Initially focused on steel and aluminum, tariffs were then directed at Chinese imports specifically, leading to retaliatory moves by the Chinese. President Trump’s top economic advisor resigned in March amid speculation that he was strongly against tariffs and breaking up the North American Free Trade Agreement (NAFTA).
More predictably, the transparency at the Federal Open Market Committee (FOMC) has continued under the leadership of recently appointed Chairman Jerome Powell. As widely expected, the FOMC raised rates by 0.25% at its latest meeting. The official statement offered a slightly more optimistic view of economic conditions. The “dot plot,” though, continued to suggest only two more increases in 2018.
The latest revision of 4Q-17 GDP for the US brought this reading up to 2.9%, from the previous value of 2.5%. While this exceeded expectations, reports suggest that first quarter GDP will soften materially from this level before demonstrating strength later in 2018 with the delayed impact of fiscal stimulus.
The unemployment rate remained at 4.1% for the sixth consecutive month, adding 103,000 new jobs in March. Core PCE, the FOMC’s preferred measure of inflation, has risen 1.6% over the past 12-months. The recent six-month annualized rate has increased to 2.3%.
Consistent with maturing economies, global growth has stabilized and is no longer accelerating. In the Eurozone economy, unemployment has dropped to its lowest level since December 2008, although inflation remains stubbornly low.
Following weakness in the prior month, the majority of risk assets again produced negative total returns during March. Large domestic stocks, as represented by the S&P 500, were down -2.5% for the month, pushing the asset class into negative territory for the year. This represents the benchmark’s first negative quarter in two years. Utilities (+3.4%) and Real Estate (+3.3%) performed well, as did Energy (+1.6%). Financials (-4.5%) and Materials (-4.5%) represented the other end of the spectrum, with IT (-4.0%) and Healthcare (-3.2%) also struggling.
Small cap stocks were notable exceptions for the month, with the Russell 2000 index up 1.3%, as this category is not as exposed to international trade conditions. Value and growth performed equally well, although the latter retains a meaningful advantage on a year-to-date basis.
In the broad international developed markets, the MSCI EAFE index was down -1.7% in March. Among the various regions, Pacific Ex Japan was down -4.2%, while the Eurozone outperformed on a relative basis (-1.1%). Developing economies were down (-1.8%), but the MSCI Emerging Markets index remains a positive outlier with a year-to-date period of +1.5%. Currency markets fluctuated with the perceived impact of protectionist measures and the US dollar ultimately ended the month slightly weaker.
Real estate rallied in March, as the category’s income levels compared more favorably amid declining long-term interest rates. The FTSE EPRA/NAREIT Developed index was up +2.5%, and the FTSE NAREIT US Real Estate index gained +3.7%.
The Alerian MLP index (-6.9%) suffered sharp declines again in March and is now down -11.1% year-to-date. The Bloomberg Commodity index was down -0.6% for the month, even as oil moved notably higher (+5.4%).
The US Treasury (UST) market acted as a portfolio diversifier in March. While front-end rates continued to grind higher with monetary policy action, longer-dated issues provided portfolio ballast (20+ year index up +3.1%). Having tested the psychologically relevant 3% threshold earlier in the year, the 10-year UST yield ended the month at 2.74%, and the yield curve has assumed its flattest posture in over a decade. Markets are comfortably anticipating the next FOMC rate hike to occur at the June meeting, but with futures pricing somewhat below the Fed’s policy projections in 2019 and 2020, the potential exists for ongoing headwinds to UST performance.
The Bloombar US Aggregate index gained +0.6% in March, reducing year-to-date losses to -1.5%. Given universal spread widening, government issues actually outperformed the primary market’s other key sectors on a duration-matched basis. IG corporate credit spreads were another 13 bps wider, and overall yields for IG corporates now exceed 3.75%.
The Bloombar 1-15-Year Municipal index returned +0.2%, as tax-exempt issues underperformed the rally in longer-term taxable issues. Retail municipal investors tend to focus on intermediate and shorter-term maturities. Weaker corporate demand for maturities beyond 10-years has resulted in a challenging technical environment. While valuations are not excessively cheap, this category tends to do well as yields rise giving the growing tax benefit.
The Bloombar US Corporate High Yield index produced a loss of -0.6% in March. Valuations remained under pressure amid equity market volatility, with CCC-rated issues lagging and the benchmark’s overall spread level widening by 18 bps. Unhedged international government bonds, including local currency emerging market debt (+1.0%), continued to outperform given declining yields and the benefit of currency translation.
Disclaimers: The data contained in this report is provided from Asset Consulting Group (ACG). This is not an offer to buy or sell securities. No investment process is free of risk and there is no guarantee that the investment process described herein will be profitable. Past performance is not indicative of current or future performance and is not a guarantee. In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Gryphon Financial Partners shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them. This was created for informational purposes only. Gryphon Financial Partners, LLC is a Registered Investment Adviser.