Key Market/Economic Observations
Federal Reserve Completes Pivot, Curve Inversion Stokes Global Growth Fears
The Federal Reserve’s (Fed’s) pivot to a more dovish interest rate outlook has likely been the greatest tailwind to the 2019 rally in financial markets. At its March meeting, the Federal Open Market Committee reinforced its message of “patience” and “data-dependency.” However, lower-than-expected manufacturing data and an inverted U.S. Treasury yield curve toward the end of the month spooked investors. We continue to see a path higher for markets; however, the composition of market leadership will likely be more reflective of a slowing versus an accelerating expansion. The softer equity performance in March likely reflected this shift in market expectations that the U.S. economy has joined the global slowdown.
International Developed Markets
Major Central Banks Signal an End to the Global Rate Hiking Cycle, Easing Financial Conditions as Global Growth Fears Persist
The Fed, European Central Bank, and Bank of Japan have responded deliberately to the inflow of weakening economic data by putting interest rate hiking cycles on hold and lowering their forecasts for economic growth. The Fed’s pause in January has likely served as the most important driver behind the recent recovery in sentiment and financial markets. More recently, however, investors seem to be finding less comfort from the pivots in monetary policy guidance and are focusing more on economic growth moderation. For example, the Eurozone yield curve continues to flatten and Germany’s 10-year bond yield is now in negative territory. International equities have responded in kind – the MSCI EAFE, Nikkei 225, and Euro STOXX 50® each posted monthly losses following strong returns earlier in the year. However, we still believe that a “soft landing” outcome is possible if Chinese stimulus proves impactful and central banks remain patient.
Emerging Market Equities Treading Water despite Mixed Economic Data
Emerging market (EM) equities were essentially flat for the month as of March 25, and largely in line with other global equity asset classes. Chinese economic data reported in March was mixed, which in our view is an early sign that fiscal stimulus could be starting to stabilize the world’s second largest economy. The EM universe is a heterogeneous mix of 24 countries, and performance would actually have been fairly strong if not for ongoing country-specific issues in Brazil and South Africa, down 5.6% and 2.8% respectively (a combined 13% of the MSCI EM Index).
Energy-Led Strength in Commodities Persists
The rally in commodities extended this month, bringing year-to-date returns to 7.5% (as of March 25). For the third consecutive month, energy offered the largest contribution to returns with West Texas Intermediate (WTI) crude oil trading above $60 per barrel, representing a 41% increase from last year’s low. Crude oil was supported by OPEC’s decision to continue with current production cuts, deferring the decision on whether to further extend those cuts until its June meeting. In industrial metals, such as copper, we continue to see supportive inventory levels, with supply and demand relatively balanced. However, trade negotiations between the United States and China remain a key driver of sentiment. Overall, a softer approach to monetary policy in both the United States and abroad is expected to be demand positive for commodities. A stabilization in economic expectations abroad and less dollar strength remain key pillars to further price appreciation going forward, in our view.
Dollar Cost Averaging versus Lump-Sum Investing: A Historical Perspective
With the S&P 500® within 4% of its all-time high, investors may be hesitant to put new money to work given volatility associated with the end of economic cycles. One possible solution that takes advantage of time, and to an extent mental accounting, is to systematically invest over a period of time, more commonly known as dollar cost averaging (DCA).
While there may be some behavioral benefits to implementing via DCA, history suggests this is not a statistically optimal approach when compared with lump-sum investing. This is not to say DCA never works; it does outperform investing a lump sum in down-trending markets. While timing future market sell-offs is challenging on its own, we need to be aware of the danger inherent to our own cognitive biases. Specifically, in the rare times that DCA works it is typically the hardest time to execute (such as in falling markets). For most investors, risk aversion is more prevalent than opportunity cost or forgone gains. This month, we contrast the merits of DCA and lump-sum investing, helping investors recognize the statistical and behavioral factors underlying this investment decision and which may be most appropriate to their individual circumstances.