Mid-First Quarter Commentary 

With the S&P 500 up 11% and the Russell 2000 Small Cap Index up over 16.4%, risk assets have been on an absolute tear since the beginning of the year.

This shouldn't come as a surprise to most, following the extreme correction in equities during December of 2018, one in which we believed was overdone considering the overall soundness of U.S economy. For example, the U.S. labor market is still robust, as seen in January's non-farm payroll print of 304,000, which far exceeded the mean estimate of 165,000. Yet, perhaps the greatest tailwind to the market this year has been the strong corporate earnings that continue to be posted.

So far during this earnings cycle, 71% of S&P 500 firms that have reported earnings have exceeded consensus expectations. The front-end of the yield curve remains well anchored as the Federal Reserve's rhetoric points to a pause in interest rate hike for the foreseeable future. As a response to the shift to dovish-ness by the Federal Reserve, emerging market equities, which are highly sensitive to U.S. monetary policy, have performed well.

China equities in particular have rebounded significantly, which can also be attributed to progress being made in trade negotiations with the United States. Pointing to the long-end of the yield curve, the thirty year yield remains range bound around the 3% level. According to our team's economic analysis, we believe that the upside of the long-end of the curve is relatively limited for 2019.

Despite this pause by the Federal Reserve, it continues to be our belief that the market is underestimating the likelihood of an additional interest rate hike later in 2019, that is if financial conditions remain stable. As a consequence, we believe that there exists a possibility that short term rates will move higher, resulting in a flatter yield curve during the second half of the year.

Return to Top