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Weekly Market Review, February 11, 2019

11 February 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

U.S. Equities

U.S. equity markets posted positive returns with the S&P 500®, representing large cap stocks, increasing a little more than 10 basis points. The Russell 2000 Index, representing small cap stocks increasing about 0.3%. The driver of this positive performance has been an improvement in earnings expectations. As of Friday, about two-thirds of the S&P 500® companies had reported fourth quarter 2018 earnings. About 70% of those companies reported better net income than expected[i]. The estimated growth for all companies, including the two-thirds of companies that have reported, is 13.3%. This growth is up from 10.6% which is what was expected on January 11, but down from the 16.2% expected as of September 30 of last year[ii]. The decline in expected earnings was a contributing factor to the market decline in the fourth quarter, while the now higher expected results are helping to push equity market performance. Many economic reports are also aiding performance. Last week the Institute for Supply Management (ISM) services index and IHS Markit Services Purchasing Managers’ Index (PMI) were released and both pointed to a slower than expected services sector. The ISM services were still solid 56.7%, but that was below the 58% in December and the expected of 57.4%[iii]. Leading indicators within the index also declined with new orders down 5% to 57.7% and export orders down 9% to 50.5%. Markit Services PMI registered 54.2 in January, down from 54.4 in December. As with the ISM index, new export orders declined in January, but inflation pressures continued to ease with input price inflation declining to a 22-month low[iv].

International Equities

Most international equity indices declined last week, with both the developed and emerging markets down about 1.3%. Data out of China showed an economy that continues to slow, with the China Composite PMI falling from 52.2 in December to 50.9 in January despite a still solid expansion within the services sector[v]. The Manufacturing sector in China declined to 48.3 from 49.7 in December[vi]. The outlook is for added contraction as new orders fell again last month. Data from Europe shows much the same with the Eurozone Composite PMI at 51.0, down slightly from the 51.1 in December. International equities were also hit by the U.S.-China trade talks. The 3-month “cease-fire” between the U.S. and China ends March 2 and last week it was announced that President Trump and Premier Xi would not meet before the deadline. This helped to push markets lower last week.

Alternatives

Commodities declined about 1.1% last week over the slow progress in trade talks and rising U.S. oil production, which is offsetting the 1.2 million barrel per day production cut out of OPEC. The All Equity REIT index increased nearly 1.6% last week.

Fixed Income

The long-dated U.S. Treasuries jumped 1.14% last week while High Quality Bonds (the Agg) increased about 0.4%. The positive bond performance is centered on fears of a slowing global economy and U.S.-China trade talks.


Past performance is no guarantee of future returns.  Performance discussed represents total returns that include income, realized and unrealized gains and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any types of securities and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees and expenses.
Frontier does not directly use economic data as a part of its investment process.
Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice.  Frontier obtained some of the information provided herein from third party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within.
Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance.  References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries or financial instruments of any kind.  This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment or tax advice.
Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision.
In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance. The performance information presented here covers different time periods. We present performance information for short time periods because we understand that clients and potential Investors are interested in this information, however, we recommend against making any investment decisions based on short-term performance information. For any investment products mentioned herein, a complete description of their investment objectives, along with details of the risks and fees involved is contained in their respective prospectus and statement of additional information, which is available on their websites and should be read fully.
It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third party investable instruments (if any) based on that index.
INDEX
INDEX DESCRIPTION
S&P 500®
Represents US large company stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, AMEX, and NASDAQ
Russell 2000
Measures the performance of the small-cap segment of the U.S. equity universe
Barclays US Aggregate Bond
Measures the performance of the U.S. investment grade bonds market. The securities must have at least one year remaining to maturity, must be denominated in U.S. dollars and must be fixed rate, nonconvertible and taxable.
Barclays Capital Long U.S. Treasury
Includes all publicly issued, U.S. Treasury securities that have a remaining maturity of 10 or more years, are rated investment grade, and have $250 million or more of outstanding face value
FTSE NAREIT All Equity REITs
This is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
[i] Refinitiv (2019), S&P 500 Earnings Dashboard, Feb. 5. Retrieved from http://lipperalpha.financial.thomsonreuters.com/2019/02/sp-500-17q1-earnings-dashboard/
[ii] MarketWatch (2019), S&P Earnings Outlook Falls Further, Toward First Decline in 3 Years. Retrieved from https://www.marketwatch.com/story/heres-what-to-expect-as-sp-500-earnings-growth-estimate-gets-cut-in-half-2019-01-14
[iii] Institute for Supply Management (2019), January 2019 Non-Manufacturing ISM® Report on Business®. Retrieved from https://www.instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?navItemNumber=31102
[iv] IHS Markit US Services PMI™ (2019), Joint-Weakest Rise in Business Since October 2017. Retrieved from https://www.markiteconomics.com/Survey/PressRelease.mvc/6693d23aa79c43589e09bf02f28ce0ce
[v] Caixin Purchasing Managers’ Index (2019), Caixin China General Manufacturing PMI™, Chinese Business Activity Expands at Softer Pace at Start of 2019. Retrieved from https://www.markiteconomics.com/Survey/PressRelease.mvc/945f5bd422af495cb40ea9660b1553b4
[vi] Caixin Purchasing Managers’ Index (2019), Caixin China General Manufacturing PMI™, Manufacturing Sector Performance Subdued at Start of 2019. Retrieved from https://www.markiteconomics.com/Survey/PressRelease.mvc/161419a830fa4925bcfc01aa89f0c85c
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