2019 Q1 Markets Update


After the -19.78% correction in the last two months of 2018, market has turned around its performance in the first quarter of 2019. S&P 500 recorded best January performance in history and its year-to-date return stands at 11.26%. The correction that ensued near the end of 2018 was caused by slew of worries. Investors fear over hawkish tone of Federal Reserve monetary policy, escalating trade tensions with China, synchronized global economic slowdown, and concerns over a potential earnings recession in 2019 were some of the suspects behind the panic. The market has regained much of what it lost during the correction in part due to better than expected earnings reports and sudden change in tone of Federal Reserve Chair Jerome Powell during his latest press conference where he backed off from running the balance sheet normalization on autopilot. Even though president Trump recently announced that he is postponing the additional tariff hike by 60 days, the threat of unresolved trade policies still looms large.

Sector Performance Review:

At +17.71%, Industrials (XLI) is the best performing sector. Boeing (BA) is the biggest contributor with the stock up 22.05% after a record Q4 earnings. They beat EPS estimate by 19.9% on the back of $28.30 billion revenue and raised expectations for airplane sales to 905, up from 806 last year. This signals strong growth for air travel, despite the world bank cutting its 2019 growth forecast due to trade tensions and currency woes. Railroads have also been performing incredibly well. CSX, NSC and UNP added a total of 2.3% of XLI’s YTD gains. Although railroads had incredible gains for 2019, they faired poorly in the last quarter of 2018, due to tensions between China and the US. However, recent data shows that rail traffic has held up well, with carloads up 1.7% from January 2018 and intermodal originations up 1.1% showing continued strength in the industry. All three companies have beat Q4 EPS and revenue expectations.

The technology sector, (XLK) is up 13.90% with biggest contribution from Microsoft (MSFT) who reported 76% growth in could service segment, Azure. In the process, Microsoft took over the crown of most valuable publicly traded company on market capitalization basis at $856.1billion. Other big contributors are the payment processors, Mastercard (MA) and Visa, adding a total of 1.36% to XLK. Mastercard reported a gross dollar volume of $1.55T an increase of 14% YoY with Visa reporting a similar outcome with an increase of 11% in payment volume.

Energy (XLE) is up 12.45% for 2019 with Exxon Mobile (XOM), Chevron (CVX) and Phillips 66 (PSX) adding a total value of 6.16% to XLE. These increases are backed by an increase refining margins and and production.

Consumer Staples (XLY) posted a total of 11.38% in gains for 2019, backed by Amazon (AMZN) and home improvement retailers like Home Depot (HD) and Lowes (LOW). Amazon has only returned 8.72% this year underperforming markets, but due to its weighting in the ETF (21.54%), it has added by far the most value to XLY with 1.93%. Much like Microsoft, the most impressive number was the cloud service performance which is up 46% YoY and brought in $7.92 billion in revenue.

Financials (XLF) underperformed the overall market in 2018 and continues to do so, posting only 10.16% YTD. Worries about raising interest rates has plagued the industry but the fundamentals are still strong. Bank of America (BAC) reported strong Q4 earnings with 52% increase in consumer banking net income and 42% increase in global wealth and investment management. Recently BB&T announced that it will merge with SunTrust Banks for a $28.2 billion in an all stock deal to create the sixth largest bank in the United States by deposits. The two Banks were having a difficult time competing with larger banks and also wanted to consolidate their tech spending which they desperately need in order to serve their customer and compete against big national banks. The merger is expected to be completed by Q4 2019 and create an annual cost savings of $1.6bn by 2022.

After stellar performance in 2018 Healthcare (XLV) has lagged behind the market, only posting 8.63% YTD. The company with the largest attribution to XLV is Johnson and Johnson with 6.58%. In recent news General Electric (GE) has agreed to sell its healthcare business to Danaher Corporation (DHR) in a $21 billion all cash deal. Some analysts believe that DHR’s organic growth will increase from 4% to 6% due to this acquisition that will be completed in Q4 2019. Danaher is funding the acquisition with an offering of $1.35 billion worth of common stock and an additional $1.35bn of Series A Mandatory Convertible Preferred Stock.

By Baruch IMG’s Portfolio Management Team