An early spring? The markets seem to think so

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management


Punxsutawney Phil predicted an early spring this year, which no doubt comes as a surprise to parts of the country still in the grips of bone-chilling cold and record snowfall. Then again, all of February seemed to be Groundhog Day in the cinematic sense of the term. In a repeat from January, stocks continued to rise, Treasury yields remained constant, and investors fretted over many of the same issues—including US-China trade relations and fourth-quarter earnings. But in the end, it was another strong month for the financial markets.

US equities

Stocks gained ground again in February, pulling US equity returns for the year into the double digits. Investors were cheered by fourth-quarter earnings, with roughly 70% of S&P 500 constituents reporting positive earnings surprises against a backdrop of continued job gains and low unemployment.

February 2019 US equity performance

FactSet Research Systems

Small-cap stocks generally outperformed larger-company shares in February, but in an interesting twist, defensive utility stocks were among the sector leaders alongside industrials and information technology. In short, it was a market that produced mixed signals. Although all sectors again finished in the black, communication services and consumer discretionary stocks fell to the rear after posting impressive returns in January.

February 2019 sector performance

FactSet Research Systems

International equities

International stock performance was mixed, with developed markets generally outperforming emerging markets. Asia was the clear international market leader, led by a sharp rebound in China amid hopes of cooling trade tensions with the US. In Europe, investors seemed to shrug off a rapidly approaching March 29 deadline for Brexit, even as the UK grapples with how it will formally exit the European common market.

Faced with rapidly deteriorating conditions in Venezuela, Latin America was among the poorest performers. Stocks in India also retreated after an extended period of impressive gains.

February 2019 international equity performance

FactSet Research Systems

Fixed income

High-yield bonds paced fixed income performance, underscoring a renewed appetite for risk following the Federal Reserve’s decision to hold back on interest rate hikes for the time being. US Treasuries held their ground, with the 10- year yield virtually unchanged during the month. The real action was in the 2- to 5-year range of the Treasury yield curve, where the yield differential remains below zero. In other words, part of the yield curve is inverted, which is rarely a good sign.

February 2019 Treasury yield curve

FactSet Research Systems

The bottom line

Although Pennsylvania's media-friendly groundhog predicted an early thaw this year, there are still cautionary market signals to heed:

•  The yield curve: The most-watched portion of the Treasury yield curve—the spread between 2- and 10-year yields—has flattened considerably, but the differential between 2- and 5-year Treasury yields is negative. An inverted yield curve has traditionally signaled an eventual economic slowdown, so Treasury yields continue to bear watching.

•  Corporate earnings: While the majority of S&P 500 companies beat earnings estimates in the fourth quarter, the beat rate is off somewhat from its recent peak and there were a number of high-profile earnings disappointments. Still, meaningful trends are difficult to discern, and we appear to be moving into an environment in which stocks no longer move together in lockstep. This makes understanding portfolio equity allocations all the more important.

•  US-China negotiations: And, yes, there’s the ever-present hope for a trade breakthrough between the US and China. Both sides appear motivated to come to a resolution, but it won’t be easy to reverse stiff tariffs that the two countries imposed on each other last year in the midst of a simmering trade war.

With equities on a roll and interest rates range-bound, it may be tempting to ramp up risk and roll the dice in search of yield. But investors should recall how they felt in November and December when the bottom fell out of the markets. There is still a role within a diversified portfolio for high-quality bonds, which can help cushion a portfolio in the event of a market downturn.

After a brutal close to 2018, the markets are off to a solid start to the year as we head into March. Clearly, investor sentiment has taken a turn for the better. Let’s hope the weather soon does as well.

Thanks for reading, and we’ll talk to you again next month.

Mike Loewengart
Vice President, Investment Strategy, E*TRADE Capital Management, LLC

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) designation. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen, CFA
Director, Investment Strategy, E*TRADE Capital Management, LLC

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA® charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a BS in finance.

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