Equity prices were broadly higher last week, with only a fractional decline on Thursday. Volatility, as measured by the CBOE VIX Index, declined from 13.50, on the open Monday, to Wednesday’s low for the week of 11.64. Thursday’s decline served to bump the index to 12.18 by Friday’s close. The only group to experience price declines last week was the interest-rate-sensitive utilities that fell 3%, as U.S. interest rates recovered from the flight to safety of the two preceding weeks. The U.S. dollar also continued its return to previous levels, boosting the MSCI EAFE® and Emerging Market Indices to 0.91% and 0.46% gains, respectively. Domestic equities were led by 3% gains in the consumer discretionary and materials stocks and a surprising 2.4% gain for the beleaguered consumer staples. The consumer stocks were led by mid-teen percentage gains in department store retailers and mid-single-digit percentage gains for consumer product producers. The materials sector’s advance was driven for the second week in a row by upper single-digit percentage gains in paper packaging and fertilizer manufacturers. There was again a notable capitalization bias in last week’s market as witnessed by the 2.27% gain in the small cap S&P 600 Index, versus the 1.62% gain for the mainstream S&P 500® Index. This trend is the latest manifestation of investors’ focus on earnings momentum as the determinant of buying preference. Following the close of first quarter reporting, the forecast earnings growth rate for 2019 has the S&P 500® Index at 7%, and the S&P 600 at 12%.
To understand the impact fund flows can have on our markets, I have included a brief time series chart (Exhibit 1) showing the gradual increase in interest rates this year and the sudden reversal caused by the events in Europe that set off a flight to safety in U.S. Treasury securities. Further, in Exhibit 2, you can see the impact that change in rates had on equities. Value stocks had been gaining on growth stocks in what is typically during a late cycle rotation. You can see at the very right of the chart, that trend was stymied at the same time interest rates reversed direction.
Exhibit 1 (Source: Crandall, Pierce & Company)
Exhibit 2 (Source: Crandall, Pierce & Company)
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