In April, the crude oil spot price increased to its highest level since late-2014. This increase in the cost of energy may serve as a tailwind behind higher inflation and nominal interest rates over the cyclical horizon, potentially counterbalanced by incrementally tighter U.S. monetary policy. During the month, most equity markets witnessed positive returns, however, a rising U.S dollar and ongoing trade war concerns weighed on the performance of emerging market equities. A more than 20 basis point rise in the 10-Year Treasury Note yield led to sizable declines across the higher quality sectors of the fixed income market, with continued outperformance experienced by lower quality credits. In real assets, increasing energy prices helped drive solid gains in both energy infrastructure and commodities, while recent weakness in real estate investment trusts (REITs) moderated during the month.
Crude Oil Spot Prices Increase to Three+ Year High
From June 2014 to February 2016, crude oil spot prices declined by 75%, with West Texas Intermediate (WTI) crude declining from over $107 per barrel to just above $26 by February 2016. Steep price declines across the energy spectrum at that time were driven by accelerating U.S. production growth, fears of waning growth in oil demand, ballooning U.S. inventory levels, as well as declining Federal Reserve (Fed) monetary policy support for the economy and a sharp increase in the U.S. dollar. However, since bottoming in 2016, WTI spot prices have nearly tripled to approximately $70 per barrel.
Reasons supporting the recent gain in crude prices include a shift in the global oil market supply/demand imbalance, declining OPEC production growth, sound economic fundamentals both domestically and abroad, and rebounding inflationary sentiment, among other drivers.
Until recently, the rally in crude oil prices seemed unacknowledged by the energy infrastructure asset category. In April, however, the Alerian MLP Index posted an 8.1% total return, the strongest monthly gain since April 2016 (data source: Alerian, Bloomberg). While likely too early to assume recent poor momentum in energy infrastructure has exhausted itself, the improvement is encouraging.
As oil prices have increased, inflationary sentiment has followed, in turn supporting nominal interest rate increases and market expectations for near-term Fed interest rate hikes. The 10-year breakeven inflation rate—which measures the yield differential between the nominal 10-year Treasury Note and the 10-year Treasury Inflation-Protected Security—has recently increased to nearly 2.20%, the highest since August 2014. A continued rise in market-implied measures of future inflation—a key input in the mosaic of factors assessed by the Fed when conducting monetary policy—is likely to support the case for an ongoing tightening of monetary conditions, both in the way of a higher fed funds rate, as well as the partial
In summary, as the supply imbalance has improved and OPEC production growth has slowed, crude oil prices have increased to healthy levels markedly higher than the trough prices that strained the energy markets. Rising oil prices have helped support inflationary sentiment, further fueling the Fed's continued normalization of its monetary policy support.
Driven by a multitude of factors, volatility dominated global equity markets throughout the first quarter. The trend showed signs of softening slightly during the month of April, with the measure declining from February’s peak levels as positive earnings news hit the market.
Positively, 78% of the S&P 500 Index companies that reported earnings beat their
first quarterearnings estimates. Over the past five years, an average of 68% of companies beatearnings estimates. Notably, the technology sector, which has been in headlines given the exuberant valuations and recent price appreciation, witnessed 94% of reporting companies to have beaten their earnings estimates as of the end of April.
Of the three major indices charted, the MSCI EAFE Index, measuring international developed equities, was the best performing index during the month of April, followed by the U.S. Russell 3000 Index. Emerging Market equities ended the month of April flat, but continue to be the best-performing index year-to-date.
Sentiment data within Europe illustrated some stabilization within the
euro zone. The euro zoneunemployment rate fell to 8.5% in April, driven by declines in France, Spain, and Italy. The stronger labor market supported consumer confidence within the region, evidenced by a year-over-year increase in consumer spending.
Chinese economic growth continued to strengthen despite the looming threat of a trade war between China and the United States. Additionally, China’s economy showed desired signs of the long-term transitioning from a predominately export and investment-led economy to a consumption-driven economy. Chinese consumption accounted for approximately 80% of the economy’s growth, with net exports falling by approximately 10%.
Minutes from the March 20-21 meeting of the Federal Open Market Committee (FOMC) were released in April. Of note is that all participants saw an improving economy and increasing inflation in the near term. Several FOMC members suggested that the Federal Reserve’s policy stance language should be changed from "accommodative" to "neutral" or "restraining."
Short-term yields continued to rise in April, but the long end of the yield curve remained contained. As measured by the 10-year 2-year spread, the yield curve hit its flattest levels since 2007 on April 17, bottoming out at 41 basis points.
10-year Treasury yields briefly crossed 3% for the first time since 2014 on inflation fears and remained close to this level through the end of the month. Broad fixed income yields reset to 3.3%, their highest level since 2010.
Credit sensitiveassets—i.e., bank loans and high yield bonds—continued to outperform interest rate sensitive assets, ending the month in positive territory and outperforming the Bloomberg Barclays U.S. Aggregate Bond Index by approximately 140 basis points.
U.S. REIT returns benefitted from
first quarterearnings generally coming in above expectations and investors focusing more on short-term lease sectors.
Internationally, Swedish property companies performed particularly well during the month, as
first quarterearnings results reported rising rents and values in 2018. Japan was the best performing market in the Asian Pacific region, boosted by the stronger-than-expected office market despite an impending increase in Tokyo’s office supply.
Oil prices continued their gain in April on news of declining inventories and increasing demand. During the month, the Department of Energy forecasted production growth of 10%, resulting in 11.6 million barrels a day by the end of 2019 compared to the current 10.5 million.
Despite potential pressures from trade disputes between the U.S. and China—to whom the U.S. heavily exports soybeans—soybean prices have held relatively steady.
10-year Treasury yields hit 3% for the first time in more than four years in April. Discretionary macro managers continued to benefit from higher interest rates, as a number of managers have positioned for tighter monetary policy globally. Systematic macro managers endured headwinds from largely trendless and choppy markets.
Volatility, particularly in U.S. equities, remained heightened following the February spike. Relative value managers benefitted from higher volatility and increased dispersion.
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All data is as of April 30, 2018 unless otherwise noted.
The Alerian MLP Index is a composite of the 50 most prominent energy Master Limited Partnerships that provides investors with an unbiased, comprehensive benchmark for this emerging asset class.
Barclays Capital Fixed Income Indices is an index family comprised of the Barclays Capital Aggregate Index, Government/Corporate Bond Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index, Municipal Index, High-Yield Index, and others designed to represent the broad fixed income markets and sectors within constraints of maturity and minimum outstanding par value. See https://ecommerce.barcap.com/indices/index.dxml for more information.
The CBOE Volatility Index (VIX) is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time S&P 500 Index option bid/ask quotes. The Index uses nearby and second nearby options with at least 8 days left to expiration and then weights them to yield a constant, 30-day measure of the expected volatility of the S&P 500 Index. FTSE Real Estate Indices (NAREIT Index and EPRA/NAREIT Index) includes only those companies that meet minimum size, liquidity and free float criteria as set forth by FTSE and is meant as a broad representation of publicly traded real estate securities. Relevant real estate activities are defined as the ownership, disposure, and development of income-producing real estate. See www.ftse.com/Indices for more information.
HFRI Monthly Indices (HFRI) are equally weighted performance indexes, compiled by Hedge Fund Research Inc. (HFX), and are used by numerous hedge fund managers as a benchmark for their own hedge funds. The HFRI are broken down into 37 different categories by strategy, including the HFRI Fund Weighted Composite, which accounts for over 2000 funds listed on the internal HFR Database. The HFRI Fund of Funds Composite Index is an equal weighted, net of fee, index composed of approximately 800 fund- of- funds which report to HFR. See www.hedgefundresearch.com for more information on index construction.
J.P. Morgan’s Global Index Research group produces proprietary index products that track emerging markets, government debt, and corporate debt asset classes. Some of these indices include the JPMorgan Emerging Market Bond Plus Index, JPMorgan Emerging Market Local Plus Index, JPMorgan Global Bond Non-US Index and JPMorgan Global Bond Non-US Index. See www.jpmorgan.com for more information.
Merrill Lynch high yield indices measure the performance of securities that pay interest in cash and have a credit rating of below investment grade. Merrill Lynch uses a composite of Fitch Ratings, Moody’s and Standard and Poor’s credit ratings in selecting bonds for these indices. These ratings measure the risk that the bond issuer will fail to pay interest or to repay principal in full. See www.ml.com for more information.
Morgan Stanley Capital International – MSCI is a series of indices constructed by Morgan Stanley to help institutional investors benchmark their returns. There are a wide range of indices created by Morgan Stanley covering a multitude of developed and emerging economies and economic sectors. See www.morganstanley.com for more information.
Russell Investments rank U.S. common stocks from largest to smallest market capitalization at each annual reconstitution period (May 31). The primary Russell Indices are defined as follows: 1) the top 3,000 stocks become the Russell 3000 Index, 2) the largest 1,000 stocks become the Russell 1000 Index, 3) the smallest 800 stocks in the Russell 1000 Index become the Russell Midcap index, 4) the next 2,000 stocks become the Russell 2000 Index, 5) the smallest 1,000 in the Russell 2000 Index plus the next smallest 1,000 comprise the Russell Microcap Index. See www.russell.com for more information.
S&P 500 Index consists of 500 stocks chosen for market size, liquidity and industry group representation, among other factors by the S&P Index Committee, which is a team of analysts and economists at Standard and Poor's. The S&P 500 is a market-value weighted index, which means each stock’s weight in the index is proportionate to its market value and is designed to be a leading indicator of U.S. equities, and meant to reflect the risk/return characteristics of the large cap universe. See www.standardandpoors.com for more information.
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