Market Attributes: U.S. Equities February 2019

Market Attributes

U.S. Equities February 2019

KEY HIGHLIGHTS

The S&P 500? was up 2.97% in February, bringing its YTD return to 11.08%. The Dow Jones Industrial Average? gained 3.67% for the month and rose 11.10% YTD. The S&P MidCap 400? was up 4.08% for the month and up 14.87% YTD. The S&P SmallCap 600? returned 4.24% in February and returned 15.24% YTD.

Exhibit 1: Index Returns

INDEX

1-MONTH (%)

YTD (%)

3-MONTH (%)

1-YEAR (%)

S&P 500

2.97

11.08

0.88

2.60

Dow Jones Industrial Average

3.67

11.10

1.48

3.54

S&P MidCap 400

4.08

14.87

1.69

2.45

S&P SmallCap 600

4.24

15.24

2.50

1.49

Source: S&P Dow Jones Indices LLC. Data as of Feb. 28, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes. Returns shown are price returns.

MARKET SNAPSHOT

In February, the S&P 500 continued where January left off, posting a broad 2.97% gain, after January's 7.87% gain (the best since January 1987, the year of the crash), mostly negating December's 9.18% fall (the worst December since 1931). The 11.08% YTD gain is the best since the 11.16% gain of 1991. The index ended the month 4.99% shy of a new closing high, as talk turned to that mark and "how sweet it would be" if it could do it for the upcoming 10th anniversary of the bull market on March 9, 2019 (actually that's a Saturday, so it would be better to close out a late Friday night of partying). The bull, six trading days short of its anniversary date, has posted an annualized 17.69% total return--over three times the 5.42% annualized rate from the end of 1999, and almost double the 9.64% from the end of 1989 (10.09% from 1926, and 11.53% since I started at S&P DJI in May 1977). On a stock basis alone, the S&P 500 has gained USD 17.49 trillion (and that excludes the USD 3.3 trillion in dividends over the period, an extra 18.8%), as all U.S. equities have added USD 23.89 trillion (with the S&P Global BMI up USD 37.17 trillion). I believe, although I do not have the data to show it (which makes it opinion), that the USD 23 trillion U.S. equity market gain has affected the greatest number of people directly in U.S. history, working out to an average gain of USD 64,718 per person (not implying that the

Contributor:

Howard Silverblatt, Index Investment Strategy, Senior Industry Analyst, howard.silverblatt@

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U.S. Equities

February 2019

distribution is even, rather it is a simple average, just as the average per capita income in the U.S. for 2017 of USD 48,150 is a simple average).

As for February, the market focused on Q4 2018 earnings, which were expected to be dismal. However, thanks to reduced expectations, the quarter came through not unscathed (15.3% lower than the record Q3 2018 period, and 3.5% higher year-over-year) but also not battered, as the bottom-line, tax-inspired beat permitted the index to post an impressive stock gain (on unimpressive growth; although sales growth was good, up 1.8% over Q3 2018 and up 5.4% year-over-year, with sales setting a new quarterly record). Outside of the number-crunching reports, trade and tariff issues continued to rattle nerves, as events had short-term impacts (e.g., spikes), with the month ending on higher expectations of a Chinese deal (or part of a deal) in March when President Trump meets with Xi Jinping (the market seems to expect a deal, so if we don't get one, prices may decline). The Brexit negotiations continued on, as they entered their final month (potentially), as UK Prime Minister May said Parliament should have an option to seek a delay in the March 29, 2019, deadline (a delay would require EU approval); while Europe has been affected, the U.S. impact has been limited. Trump declared an emergency over the border wall between the U.S. and Mexico, planning to draw money from other areas to build it over Congressional objections. The House voted to nullify the decree, but lacked the two-thirds vote needed to override a promised Trump veto, as the saga continued on into the Senate and was expected to end up in court (with limited market impact).

With Q4 (and full-year) 2018 earnings mostly completed, March will start to focus on events and the underlying economy. The market will start to size up 2019 (with actual data via 10-Ks and company meetings), along with the underlying growth rate of business (which could cause some reallocation), as recent low volatility could give way to sidelined money finding a home. No change in interest rates is expected from the Fed at its meeting set for March 19-20, 2019; however, remarks on timing of both rate changes and its balance sheet are expected to affect markets. On the fun side, the bull turns 10 on March 9, 2019, as Lyft is expected to drive its IPO (with Uber right behind it, but not tailgating--its IPO will potentially be in Q2 2019), with the 2020 U.S. presidential race expanding.

Historically, February posts gains 53.3% of the time, with an average gain of 2.88% for the up months and a 3.34% average decrease for the down months, with an overall average of -0.02%. Historically, the S&P 500 is up 52.8% of the time, but on Valentine's Day, February 14th, it has gone up only 42.6% of the time--this year held true to history, as the index declined 0.27%. March historically posts gains 60.4% of the time, with an average gain of 3.35% for the up months and a 3.61% average decrease for the down months, with an overall average of 0.60%. Historically, the S&P 500 is up 52.8% of the time, but on the Ides of March (March 15th) it goes up 60.3% of the time.

The S&P 500 closed February at 2,784.49, up 2.97% (3.21% with dividends) from last month's 2,704.10 close, when it declined 7.87% (8.01%). The gain pushed the index closer to a new high, as it ended the month 4.99% away (Sept. 20, 2018; 2,930.75). Year-to-date, the S&P 500 was up 11.08% (11.48% with dividends). For the three-month period, the index was up 0.88% (1.42% with dividends); for the one-year period, the index was up 2.60% (4.68% with dividends). The change from the close of 2017 was 4.15% (6.59% with dividends), and the index was up 30.14% (36.34%) from the Nov. 8, 2016, election's 2,139.56 close (12.11% and 14.39% annualized, respectively). The Dow? closed the month at 25,916.00, up 3.67% (4.03% with dividends) from last month's 24,999.67 (its best January since 1989, up 8.01%), when it was up 7.17% (7.27%). Year-to-date, The Dow was up 11.10% (11.62%), the three-month return was 1.48% (2.03%), and the one-year return was 3.54% (5.95%).

MARKET ATTRIBUTES

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U.S. Equities

February 2019

The bull market will be 10 years old on March 9, 2019 (absent a crash); it was up 312% from its starting point and up 407% with dividends (15.24% annualized and 17.69% annualized with dividends).

With over 95% of the market value reported, earnings are beating their lowered estimates (nice how that works out--almost all the time), with sales coming in stronger than expected, as they are set to post a quarterly record. To date, 485 issues have reported; 330 (68.0%) have beaten on earnings, 130 (24.9%) have missed, and 34 (7.0%) have met. Sales reports show that 294 of 480 issues have beaten sales estimates (61.3%). With 87% of Q4 2018 buybacks reported, the quarter is running 3.6% ahead of the same issues for Q3 2018 and 57.0% ahead of Q4 2017, potentially setting a fourth consecutive record (one might expect to hear more from Washington on it). The S&P 500 target price was 3,065 (10.1% from here; 3,055 last month), and The Dow target price was 28,122 (8.5% from here; 27,884 last month).

As the reporting starts to trim down, the Q4 2018 results point to a 15.3% decline over the record Q3 2018 results (helped down by new mark-to-market rules for investments); the year-over-year gain was 3.5% (the first three quarters for 2018 combined were 28.6% over the same period for 2017). The fullyear 2018 operating earnings are expected to post a 21.8% gain over 2017 (with taxes getting most of the credit), while 2019 estimates are pointing to a 9.5% gain over 2018 (something the Street is starting to accept). Sales are expected to set a record, up 1.8% over Q3 2018 and up 5.4% year-over-year, as 2018 was 9.1% over 2017. One of the results (of lower earnings and higher sales) is lower margins, which have declined to 10.08% for Q4 2018 from the record 12.13% for Q3 2018 and 10.27% of Q4 2017; the expected 10.90%, however, remains much higher than the historical 8.12% average (from 1988).

Trump and Congress came to an agreement to open the government, as USD 1.4 billion was allocated to additional border barriers. Trump then declared an emergency situation, permitting him to reallocate funds for the wall (an additional USD 4.3 billion) without Congressional approval; 16 states then filed suits over Trump's declaration. The House passed a resolution (sending it to the Senate) to negate Trump's emergency wall declaration, with a 245-182 vote, short of the two-thirds needed to override Trump's promised veto. Trump will suspend the arms control Intermediate-Range Nuclear Forces Treaty with Russia and exit it in six months, citing Russia's lack of compliance. Trump extended the March 1, 2019, deadline for increasing tariffs (from 10% to 25%) on USD 200 billion of Chinese imports, as he gave no new deadline date. Trump cited productive talks with China for the reason, and said he plans to meet with Xi Jinping in March. Trump traveled to Vietnam and met with North Korean leader Kim Jong-un (for the second time; the first was in June 2018, in Singapore), as smiles and hope ended with no deal for the U.S. to drop sanctions and North Korea to dismantle nuclear weapons. As the meeting took place, Vietnam's Bamboo Airways and VietJet Aviation signed deals to buy 110 aircraft from Boeing (BA) for USD 15 billion.

As the race to the Nov. 3, 2020, U.S. presidential election goes public, President Trump is expected to rerun; currently there is no major Republican opposition candidate. Meanwhile, 12 Democrats have declared their candidacy (including U.S. Senators Cory Booker [New Jersey], Kamala Harris [California], Kristen Gillbrand [New York], Bernie Sanders [Vermont], and Elizabeth Warren [Massachusetts]), with the group expected to grow. Buybacks became an issue, as several senators spoke of their negative impact on investments and their impact on diverging wealth distribution, suggesting legislation to limit their use via conditions.

MARKET ATTRIBUTES

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U.S. Equities

February 2019

The U.S. Federal Reserve's Jan. 29-30, 2019, meeting notes revealed that it would release a plan to shrink its USD 4 trillion balance sheet, as it felt additional time was needed to measure the impact of its prior interest rate increases, therefore pausing future increases for now. In his semiannual testimony before Congress, Fed Chair Jerome Powell confirmed the Fed's "patient" approach to future interest rate increases (no change and no market impact). The U.S. national debt passed USD 22 trillion for the first time (the S&P 500 has a full market value of USD 24 trillion).

The race to be the world's largest publicly held company continued (on a full market-value basis), as Microsoft (MSFT) led with USD 866 billion, then came Apple (AAPL) with USD 822 billion, and Amazon (AMZN) was in third place with USD 802 billion. On an index float basis the order is the same, with the market values at USD 866 billion, USD 781 billion, and USD 674 billion, respectively. Retailer WalMart (WMT) reported strong holiday sales, countering reports from other retailers that shoppers were pulling back. Apple and investment management firm Goldman Sachs (GS) said they would issue a joint credit card paired with iPhones (not all versions), with the ability to manage money. Food and beverage maker Kraft Heinz (KHC) declined 28.6% for the month, as it missed earnings, issued weak guidance, took a USD 15 billion brand write-down (expected to be a non-cash charge), cut its dividend by 38%, and said the Securities and Exchange Commission was investigating its accounting practices. General Electric (GE) said it would sell its biotechnology business to Danaher (DHR) for USD 21 billion in cash. Retailer Gap (GPS) said it would split into two publicly traded issues. Bank of America (BAC), which purchased Merrill Lynch in 2008 (in a fire sale during the 2008 financial crisis), said it would drop the Merrill Lynch name from some of its business operations and rebrand them. S&P Dow Jones Indices added S&P MidCap 400 issues Atmos Energy (ATO) and Wabtec (WAB) to the S&P 500, as it removed Newfield Exploration (NWF), which was acquired by Encana (ECA), and Goodyear Tire & Rubber (GT), which was to be added to the S&P MidCap 400.

The 10-year U.S. Treasury Bond closed the month at 2.72%, up from last month's 2.64% (2.69% for year-end 2018, 2.41% for 2017, and 2.45% for 2016). The pound closed up at 1.3264 from 1.3110 (1.2754 for year-end 2018, 1.3498 for 2017, and 1.2345 for 2016), the euro was down to 1.1369 from last month's 1.1448 (1.1461, 1.2000, 1.0520), the yen closed at 111.38 from last month's 108.89 (109.58, 112.68, 117.00), and the yuan closed at 6.6937 from last month's 6.8785 (6.5030, 6.9448). Oil increased to close at USD 57.25 from last month's USD 54.13 (USD 45.81 at year-end 2018, USD 60.09 for 2017 and USD 53.89 for 2016). U.S. gasoline pump prices (EIA, all grades) increased, closing the month at USD 2.471 from last month's USD 2.343 per gallon (USD 2.358, USD 2.589, USD 2.364). Gold was down, closing at USD 1,314.70 from last month's USD 1,324.80 (USD 1,284.70, USD 1,305.00 for year-end 2017, and USD 1,152.00 for year-end 2016). VIX closed at 14.78, trading as high as 17.89 and as low as 13.44, down from 16.57 last month (25.42 at year-end 2018, 11.05 at year-end 2017, and 14.04 at year-end 2016). Bitcoin closed at USD 3,825, up from last month's USD 3,442, trading as high as USD 4,222 and as low as USD 3,362 (USD 3.747 at year-end 2018, USD 13,850 in 2017, and USD 968 in 2016).

MARKET ATTRIBUTES

4

U.S. Equities

February 2019

INDEX REVIEW

S&P 500

The S&P 500 continued in February where it left off in January, posting a broad 2.97% gain, after January's 7.87% gain (the best since January 1987, the year of the crash), which mostly negated December's 9.18% fall (the worst December since 1931). The 11.08% YTD gain was the best since the 11.16% gain of 1991; the gains left the index 4.99% shy of a new closing high. The trading (and investing) momentum appears to have changed from January's initial rebound and bottom-fishing mentality (reactions to December's decline) to one of cautious optimism, based on a slower U.S. growth rate, continued low interest rates, and an eventual China trade deal (which may not make many happy, but it will be a deal and therefore define rules and taxes for planning).

March will be busy; March 9, 2019, will mark the 10th anniversary of the bull market and is expected to get play in the press. For investors, it may be a good time to review their holdings and strategies, focus on the future, and not gloat (hopefully) over the past. As for the bull run, it has posted an annualized 17.69% total return and produced S&P 500 stock gains of USD 17.49 trillion (and that excludes the USD 3.3 trillion in dividends over the period, an extra 18.8%). The Street should start to focus on the underlying economy and sector outlooks next month (via actual 10-Ks and company meetings), along with the underlying growth rate of business (which could cause some reallocation), as recent low volatility could give way to sidelined money finding a home. The U.S.-China trade issue is expected to take center stage, as some agreement (but not necessarily a final agreement) is expected. No change in interest rates is expected from the Fed at its meeting set for March 19-20, 2019; however, remarks on timing of rate changes and its balance sheet are expected to affect markets.

The S&P 500 closed at 2,784.49, up 2.97% (3.21% with dividends) from last month's 2,704.10 close, when it declined 7.87% (8.01%). The gain pushed the index closer to a new high, as it ended the month 4.99% away (Sept. 20, 2018; 2,930.75). Year-to-date, the S&P 500 was up 11.08% (11.48% with dividends). For the three-month period, the index was up 0.88% (1.42% with dividends); for the one-year period, the index was up 2.60% (4.68% with dividends). The change from the close of 2017 was 4.15% (6.59% with dividends), and the index was up 30.14% (36.34%) from the Nov. 8, 2016, election's 2,139.56 close (12.11% and 14.39% annualized, respectively).

Volatility decreased, as 2 of the 19 days moved at least 1% (both up), compared with last month's 6 of 21 (4 up and 2 down; 2018 had 32 up and 32 down). Intraday volatility (daily high/low) decreased to 0.69% from January's 1.26% and December's 2.56%; 2018 was 1.21%, and 2017 was 0.51%, which was the low from 1962, when my data starts (the average is 1.43%). The monthly high/low price spread significantly declined to 4.91% from last month's 10.84%, after December's large 19.33% (the highest level since the 20.27% posted in October 2011), and it was lower than the one-year 7.64% average and 10-year average of 6.49%. Trading decreased 4% for the month, after last month's 11% decline (adjusted for trading days), and it was down 12% year-over-year. Sector variance was unchanged, as all 11 sectors were positive for the month again, compared with December, when all 11 were negative. The spread between the best (Information Technology, 6.63%) and worst (Consumer Discretionary, 0.65%) sectors for the month was 5.98%, down from last month's 7.99%; for 2018, the spread was 18.99%.

For the month, all 11 sectors increased, as they did in January (but January was much stronger), as an acceptance of slower growth and continued low interest rates offset some of the concern over lower

MARKET ATTRIBUTES

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