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-Murray Titterington, CFP, CIMA

Most of the major U.S. equity indices rose in March, and all of the indices notched their biggest quarterly gains in nearly a decade. The rise in US equity markets was attributed to signs of progress on U.S. – China trade negotiations and indications that central banks would keep interest rates low as global growth slows. However, an inversion of the yield curve (when the yield of the 10-year bond falls below the yield of the 3-month Treasury bill) created a sell-off in the latter half of the month, as this phenomenon is considered an indication of a recession (see chart).

During March the NASDAQ gained 2.6%, the S&P 500 rose 1.8%, and the Dow Jones Industrial average was virtually flat, adding less than .01%, The Russell 2000 small cap index lost 2.6% during the month. For the quarter, all of the indices recorded double-digit returns, led by the NASDAQ (17.4%), Russell 2000 (13.8%), S&P 500 (14.0%), and Dow (12.4%). The indices have now recouped most of the losses suffered in the last quarter of 2018.

8 of the 11 S&P sectors had positive performance in March, led by Real Estate (4.6%), Information Technology (3.7%), and Consumer Discretionary (3.4%). Financials were the worst-performing sector (-3.1%), followed by Industrials (-2.2%), and Health Care (-0.8%). All 11 sectors ended higher for the quarter, for the first time since 2014. Technology shares appreciated the most, rising 18.2% amid signs of continuing profits from companies such as Facebook and Netflix. Real Estate (16.8%) and Energy (15.6%) also posted strong quarterly performance. Health Care (4.9%), Financials (7.6%), and Materials (8.9%) were the worst-performers.
West Texas Intermediate Crude closed at $60.14 a barrel, above the previous month close of $57.22. This was the strongest quarterly percentage change since Q2 2009. Potential sanctions on Venezuela, pressure on Iran to reduce exports, and a drop in U.S. oil rigs were contributed to the gains.

The yield on the 10-year fell 30 basis points last month, closing at about 2.4%. The decline followed the Fed’s signal at its March 18-19 meeting that it wasn’t likely to raise interest rates in 2019, a reversal from the two rate increases indicated in its December forecast. This caused the previously-mentioned inversion of the yield curve, a recession indicator that continues to be a source of economic growth concern.

Economic indicators were mixed last month. The Chicago PMI fell 60 basis points to a reading of 58.7, up from 64.7 in February, below consensus estimates of 61.0. However, any reading above 50 indicates improving conditions. The Consumer Sentiment Index for February increased to 98.4, above February’s reading of 93.8. The Consumer Confidence index dropped to 124.1 from 131.4 in February, its second-lowest rate in a year. The unemployment rate fell to 3.8% from 4.0%, probably partially due to furloughed government workers returning to their jobs. Gross domestic product (GDP) numbers were revised downward to show that the U.S. economy grew 2.2 in the 4th quarter of 2018. A recession can be defined as two consecutive quarters of negative GPD growth. The Consumer Price Index for All Urban Consumers (CPI-U) increased in February by 0.2% on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 1.5%.

With one quarter of the year behind us, we are cautiously optimistic about further market growth. However, risks remain as U.S. – China trade negotiations drag on, Brexit implications are assessed, and interest rates continue to be monitored. Additionally, with major indices above where many analysts expected them to end the year, investors are uncertain if there is a catalyst to push stocks higher. We believe that the economy is still healthy and the equity markets will provide long-term growth, but investors should carefully evaluate their risk tolerance when making investment decisions.

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