US equities market ended the first quarter of 2019 on a very strong note with the S&P500 gaining +13.41%, the best since 1998. It was largely driven by improving trade talks with China, accommodative monetary policy statements coming out of Federal Reserve, and strong economic reports.
The key highlight of the quarter was the yield curve inversion near the end of the quarter when the 10 year treasury note’s yield dipped below the 3-month treasury yield. This cause the market to sell off two days in a row because it has historically preceded an economic recession. But the market recovered back to year-to-date high after the inversion went away before the end of the quarter.
Information Technology was the best performing sector and it was up +19%. About 11% of the return came from just five companies; AAPL, MSFT, CSCO, V, and MA. The remaining 9% came from semiconductor and software companies. Real Estate was the second best performing sector at +17.51% and four major companies were responsible for ~7% of the return. Though the industrial sector was the best performing sector between February and early March, it ended the quarter in third place at +17%. Boeing stock performance near the end of the quarter played a major role in bringing down sector performance. The company represents a whooping 9% of the sector.
On the other hand, healthcare was the worst performing sector at +6.45% followed up by financials at +8.49%; both sectors underperformed the market. Healthcare underperformance was driven by a negative outlook on some of the major industries. As we head into the 2020 election where healthcare is the number one voter issue, market is bracing for a big shake up as a result of increasing rhetoric from the both sides of political spectrums. Lots of key hot topic issues such as universal healthcare and drug pricing are on the agenda list. While pharmaceutical companies and healthcare provides are getting hurt the most, healthcare equipment makers has been able to stay out of the cross fires.
As we enter in to the second quarter with earnings season kicking off at the middle of April, one thing to keep an eye on is for signs regarding corporate earnings recession. The current estimate for S&P500 2019 Q1 EPS growth is at -4.2% according to Factset and if the companies report negative earnings growth, it will the first year-over-year decline in earnings since Q2 2016.
By Baruch IMG’s Portfolio Management Team