January 2019 Monthly Market Review
Some of the concerns that led to heightened volatility in December appeared to abate at the start of 2019. The U.S. government shutdown ended with Congress passing a continuing resolution that lasts until mid-February. Strong fourth quarter earnings reports in the U.S. also supported equity markets. Lastly, the Federal Reserve held policy rates steady and softened the hawkish tone of its communication.
Most risk assets rallied sharply on the back of these developments. The S&P 500 was up 8.0% for the month, which is the Index’s best January return since 1987. In terms of individual sectors, the best performers in January were generally the worst performers in the fourth quarter of 2018. This reversion was broadly true across individual holdings as well. The FAANG stocks were among top contributors to broader index gains. Among non-U.S. equities, the only notable country to post a loss was India, which fell amidst uncertainty ahead of the upcoming parliamentary election in May. Emerging markets on the whole outpaced domestic equities. Developed non-U.S. markets were up in aggregate with all countries in positive territory.
Many of the long/short equity managers that struggled in the fourth quarter also bounced back in January. Approaches varied, but many value-oriented managers held on or even added to their core long positions during the fourth quarter downturn. Entering 2019, several managers were fully invested on the long side and had allowed net exposures to tick up modestly, reflecting the level of conviction in their—now cheaper—portfolios. These managers were rewarded following the reversal of fortunes for beaten-down sectors such as financials, industrials, and technology. Managers that reduced gross and net exposure following the volatile fourth quarter lagged their more market-exposed peers during the month. In addition, event-driven and credit managers with limited equity exposure produced more modest results.
Most marketable real asset segments enjoyed a strong January, with global REITs and natural resource equities outperforming the broad equity markets. U.S. and Asian REITs advanced amidst low interest rates and resilient demand across many sectors. U.K. REITs also rallied as investors appeared to take advantage of discounted valuations after U.K. property stocks fell by 18% in 2018 and traded well below the reported net asset values.
Within natural resources, crude oil rallied sharply after declining more than 30% in the final quarter of 2018. Strong compliance with Organization of the Petroleum Exporting Countries and Russian production cuts (effective January 1st), declining Venezuelan production and exports, and falling U.S. rig counts combined to allay some of the market’s concerns around oversupply. On the demand side, the Fed’s more dovish stance appeared to serve as an offset to concerns that slowing Chinese growth would crimp consumption. In a reversal from the fourth quarter of 2018, higher oil beta exploration and production companies outperformed mega cap integrated oil and gas companies.