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First Quarter 2019 Market Commentary

Economic Highlights


Webinar Replay

 First Quarter 2019
Market Update
Presented by Josh Emanuel, CIO, Wilshire Funds Management.

GDP: Real GDP growth slowed to 2.2% annualized during the fourth quarter of 2018. At 2.9%, real growth for the year was the strongest since 2015. Consumer spending was the main driver of growth for the first quarter. Private investment was also a positive contributor due to both business and inventory investment. Housing investment, however, was down. A change in net exports was a minor detractor and government spending was also down slightly. Source: Department of Commerce (BEA)

Interest Rates: The Treasury yield curve fell across all maturities during the quarter, worsening its inversion. The largest negative slope in the yield curve was from the 3-year to one month range, which ended the quarter with a difference of -22 basis points. The 10-year Treasury was down 28 basis points during the quarter, finishing at 2.41%. The Federal Reserve left the Federal Funds Rate unchanged during the quarter after a 0.25% increase in December. However, the Fed did change their projection for 2019 from two rate increases to zero rate increases. Source: U.S. Treasury

Inflation: Consumer price increases have slowed, with very little growth during the past six months. The Consumer Price Index was up 0.1% for the three months ending February and 1.5% for the one-year period. The 10-year breakeven inflation rate increased modestly during the first quarter to 1.88% at the end of March versus 1.71% at the beginning of the year. Source: Department of Labor (BLS), U.S. Treasury

Employment: Jobs growth continues to be solid, with total nonfarm employment increasing by an average of 180,000 jobs per month during the first quarter of 2019. The unemployment rate ended the quarter steady at 3.84%. Source: Department of Labor (BLS)

Housing: Home prices continue to move higher into 2019, with the S&P Case-Shiller 20-city Home Price Index up 0.5% for the three months ending January 2019. During the past 12 months, the Index is up 3.5%. Source: Standard & Poor’s

The U.S. Equity Market

The U.S. stock market, represented by the Wilshire 5000 Total Market IndexSM, was up 14.11% for the first quarter of 2019. This marks the strongest quarter for U.S. equities since 2009, when the market was rebounding from the 2008 recession. Concerns about global growth were dwarfed by the Fed’s updated forecast for no rate increases in 2019 and a looser stance on unwinding quantitative easing enacted during the recovery. While gains early in the year are welcome, markets are likely to retain the volatility that was present in 2018.

U.S. Equity

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire 5000 Total Market IndexSM 1.50 14.11 14.11 8.93
Standard & Poor’s 500 Index 1.94 13.65 13.65 9.50
Standard & Poor’s TSX Index (CAD) 1.01 13.29 13.29 8.11
Wilshire 4500 Completion IndexSM -0.90 16.17 16.17 5.23

U.S. Equity by Size/Style

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire U.S. Large Cap IndexSM 1.84 13.96 13.96 9.52
Wilshire U.S. Large Cap Growth IndexSM 2.37 15.69 15.69 10.12
Wilshire U.S. Large Cap Value IndexSM 1.37 12.44 12.44 8.97
Wilshire U.S. Small Cap IndexSM -1.74 15.51 15.51 3.75
Wilshire U.S. Small Cap Growth IndexSM -1.87 16.35 16.35 3.59
Wilshire U.S. Small Cap Value IndexSM -1.61 14.63 14.63 3.87
Wilshire U.S. Micro Cap IndexSM -2.21 15.18 15.18 -2.49

Large capitalization stocks underperformed their small cap counterparts for the quarter, as the Wilshire Large Cap IndexSM was up 13.96% versus a gain of 15.51% for the Wilshire Small Cap IndexSM. Relative to large cap stocks, small cap stocks benefitted from their domestic bias, as international uncertainty dampened returns abroad, and also benefitted from strong health care sector performance. However, the large cap segment of the market leads small caps for the past twelve months. The Wilshire U.S. Micro Cap IndexSM returned 15.18% for the quarter but was down -2.49% for the one year. Growth stocks led value stocks during the first quarter and generally outperformed during the past twelve months.

A relatively dovish Fed, coupled with progress with the U.S.-China trade talks, helped propel growth-oriented sectors, such as Information Technology and Consumer Discretionary, while more value-oriented sectors, such as Financials and Utilities, were relative laggards.

Probability of Recession: Next 12 Months

Possibility of Recession

Source: Federal Reserve

Several developments led to a yield curve with two key characteristics: an inverted portion from short-term to three-year yields, and almost no difference between short-term and 10-year yields. The Fed’s move towards a more dovish stance on monetary policy, a weak report on the European economy, and a drop in U.S. retail sales all contributed to investors pricing yields lower. The Fed’s Bank of New York publishes data that focuses on the yield curve as a leading indicator of future real economic activity. Their model uses the difference between 10-year and three month Treasury rates to calculate the probability of a recession in the U.S. in approximately 12-months’ time. While the historical results include some false-positives, the current probability sits at 27% for a recession in 2020.

The Non-U.S. Equity Market

Equity markets outside of the U.S. enjoyed a strong start to 2019, although they generally underperformed the U.S. equity market. While there are signs of an economic slowdown in Europe, by far the biggest unknown is the result of the U.K.’s Brexit. The latest draft proposal to exit the European Union (EU), agreed upon by Prime Minister Theresa May and EU officials, was again rejected by the U.K. Parliament. While the final exit date has been delayed, a failure to reach an agreement on a transition period could mean significant uncertainty for markets. The Japanese equity market posted strong returns during the first quarter despite several signs of an economic slowdown, similar to much of the rest of the world. Trade talks between the U.S. and China continue with occasional signs of progress. Any completed agreement would help clarify a huge unknown and could have a positive effect on global markets and economies. A mild strengthening of the U.S. dollar against developed market currencies mostly weighed on foreign equity results for U.S.-based investors.

Non-U.S. Equity

  USD (%) Local Currency (%)
MSCI AC World ex U.S. 0.60 10.31 10.31 -4.22 1.31 10.54 10.54 1.90
MSCI EAFE 0.63 9.98 9.98 -3.71 1.34 10.59 10.59 2.83
MSCI Europe 0.61 10.84 10.84 -3.72 1.96 11.58 11.58 4.31
MSCI Pacific 0.69 8.53 8.53 -3.86 0.34 8.96 8.96 0.32
MSCI Japan 0.57 6.66 6.66 -7.84 -0.01 7.61 7.61 -4.08
MSCI EM (Emerging Markets) 0.84 9.91 9.91 -7.41 1.37 9.83 9.83 -1.94
MSCI ACWI ex U.S. Small Cap 0.15 10.26 10.26 -9.49 0.80 10.47 10.47 -3.70

The Fixed Income Market

The U.S. Treasury yield curve fell across most maturities during the quarter, with the biggest decreases occurring in the five to 10-year portion of the curve. The bellwether 10-year Treasury yield ended the quarter at 2.41%, down 28 basis points from December. The Federal Open Market Committee (”FOMC”) left its overnight rate unchanged during the quarter at a range of 2.25% to 2.50%. The FOMC adjusted their forecast for future rates, communicated through their “dot plot,” from two rate increases in 2019 to zero. The FOMC also adopted a more dovish position on unwinding their balance sheet. As a result, credit spreads tightened during the quarter within both the investment grade and high yield markets as investors reached for yield in riskier assets.

U.S. Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays U.S. Aggregate 1.92 2.94 2.94 4.48
Bloomberg Barclays Long Gov’t/Credit 4.70 6.45 6.45 5.24
Bloomberg Barclays Long Term Treasury 5.26 4.67 4.67 6.24
Bloomberg Barclays U.S. TIPS 1.84 3.19 3.19 2.70
Bloomberg Barclays U.S. Credit 2.44 4.87 4.87 4.89
Bloomberg Barclays U.S. Corporate High Yield 0.94 7.26 7.26 5.93

Non-U.S. Fixed Income

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Bloomberg Barclays Global Aggregate 1.25 2.20 2.20 -0.38
Bloomberg Barclays Global Aggregate (Hedged) 1.79 2.99 2.99 4.93
Bloomberg Barclays EM Local Currency Government Universal 0.59 2.92 2.92 -1.12
Bloomberg Barclays EM Local Currency Gov’t Universal (Hedged) 0.92 1.80 1.80 5.11
FTSE World Government Bond Index ex-U.S. 0.89 1.52 1.52 -4.55
FTSE World Government Bond Index ex-U.S. (Hedged) 1.91 3.10 3.10 5.12

Real Estate/Commodity

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire U.S. RESISM 3.20 16.02 16.02 19.34
Wilshire Global ex U.S. RESISM 2.90 13.18 13.18 6.96
Wilshire Global RESISM 3.09 15.01 15.01 14.82
Bloomberg Commodity Index -0.18 6.32 6.32 -5.25
S&P GSCI Commodity 1.61 14.97 14.97 -3.04
Alerian MLP Index 3.43 16.82 16.82 15.11

The Real Estate and Commodity Markets

U.S. real estate was one of the best performing sectors this quarter, recieving a boost from falling interest rates. Global real estate securities were also up double digits leading to their best performing quarter in more than four years. Commodity results were positive for the quarter as crude oil rose 32.4% to $60.14 per barrel. MLPs benefited from the combination of rising oil prices and falling interest rates to rebound during the quarter and finish up 16.82%. Gold prices were up, finishing the quarter at approximately $1,299 per troy ounce, up 1.30% from last quarter.

The Liquid Alternatives Market

Liquid alternatives managers rallied in the first quarter across all sub-strategies. Long/short equity managers made most of their gains in January, as equity markets rallied to mark their best quarter since 2009. Growth managers slightly outperformed their value counterparts as global growth fears were tempered by softening trade war tensions and newly found optimism after the Fed’s move toward a more dovish stance on quantitative tightening. Credit strategies posted positive results as corporate spreads tightened during the quarter, especially within the high yield market. Event driven managers generally benefitted from long exposure to both equity and fixed income markets, while merger arbitrage strategies had a relatively quiet but positive quarter. Volatility arbitrage managers had a mixed but generally positive start to the year, with neutral-to-short biased managers performing positively and longer-biased strategies drawing down considerably as volatility collapsed across asset classes. After incurring substantial losses during the equity market reversal in January, CTAs posted positive returns for the quarter primarily due to long bond exposure. Discretionary macro managers also performed positively to the extent they held long bond and equity exposure.

  MTD (%) QTD (%) YTD (%) 1 Year (%)
Wilshire Liquid Alternative 0.60 3.21 3.21 -0.18
Wilshire Liquid Alternative Equity Hedge 0.29 4.64 4.64 -0.95
Wilshire Liquid Alternative Event Driven 0.42 2.51 2.51 2.57
Wilshire Liquid Alternative Global Macro 2.03 1.91 1.91 -2.35
Wilshire Liquid Alternative Multi-Strategy 0.47 3.91 3.91 -0.17
Wilshire Liquid Alternative Relative Value 0.45 2.55 2.55 0.71


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