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Global economic trends overshadowed both U.S. stock and commodity markets last week, as news of weaker-than-expected results from Germany sent investors...



Weekly Market Overview | March 25, 2019

March 25, 2019
By Peter Sorrentino, Chief Investment Officer

Global economic trends overshadowed both U.S. stock and commodity markets last week, as news of weaker-than-expected results from Germany sent investors to the sidelines in search of safe havens. The riskier and often less liquid market segments suffered larger declines, as investors switched to U.S. Treasury obligations and precious metals. The yield on the benchmark ten-year Treasury note fell 5.72%, to close the week at a 2.439% yield to maturity – less than the prevailing 2.45% yield offered on the four-week Treasury bill. The decline in yields weighed heavily on the financial sector, sending it down 4.84% for the week, as the prospect of both slowing economic activity and reduced lending spreads dimmed earnings prospects for the group. The traditional cyclical sectors, industrials and materials, were down considerably as well, falling 1.41% and 1.93%, respectively, on reduced future expectations. It was not a sea of red last week, however, as the consumer stocks posted gains on stronger revenue and improved margins. The discretionaries added 0.97%, while the staples managed to tack on 0.69%. The decline in interest rates lifted the utility shares as well, boosting them another 0.52%. The impact of reduced trading liquidity was clearly apparent last week. While the S&P 500® Index lost 0.77%, the S&P 400® Index fell 2.16% and the S&P 600® Index dropped 3.08%, we were witnessing some crowding at the exits. Even though this week’s decline started off outside the U.S., those markets managed to finish the week with smaller losses, and for the emerging markets there were gains. The most obvious cause of this is the elevated valuation of the U.S. equity market versus global peers, rendering it more vulnerable to negative revisions. Among commodities, energy and precious metals were slightly higher, while industrial metals and agricultural prices were mixed with a slight bias to the downside.

In their ground-breaking writings, Harry Markowitz and Burton Malkiel both start off by saying that the investor must have relative beliefs regarding future performance before beginning the process of portfolio construction. To this day, the principal challenge of constructing an effective asset allocation is the adoption of future return expectation. Guiding this process is the understanding of past asset class valuation levels. By way of example, most texts will state the ten-year average return for U.S. stocks is 10%. Exhibit 1 represents the total return distribution for the S&P 500® Index over one-, three- and five-year intervals from 1932 forward. At first glance, the returns do appear to have a central tendency around the 10% level. On closer examination, what you will see is that peak return periods are followed by subpar returns. Case in point, the late 1990s, where 1997, 1998 and 1999 are among the best five-year return intervals recorded. They are, however, followed by the opening years of the 2000s, which are among the worst five-year periods recorded. In this decade, 2012, 2013, 2014, 2016 and 2017 are among some of the best market performance years since the late 90s, which begs the question: will the next five years parallel the early 2000s for large cap domestic stocks? There is no way to precisely time the market, but we can bias portfolios toward asset classes where recent performance puts their valuation at the lower end of its typical range. We have access to research on this question for forty-seven asset and sub-asset classes; it is this depth of research that aids in answering these questions.

S&P 500® Stock Index

Exhibit 1 (Source: Crandall, Pierce & Company)

For a PDF version of this publication, click here: 03.25.19_WeeklyMarketOverview

 

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Source: Unless otherwise noted, all statistics herein obtained from Bloomberg.
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