U.S. Versus International
The S&P 500, an index of large U.S. companies, posted a total return of 13.6% for the First Quarter of 2019. U.S. stocks outperformed international for the quarter as measured by the All Country World Index ex-U.S. stocks, a representation of international stocks outside the U.S. Total return for the First Quarter of 2019 was 10.4%.
The performance gap between U.S. and international stocks was relatively muted in the first quarter. However, some concerns remain in international markets. Indications of slower growth in European and Japanese markets weighed on international shares. Trade tensions regarding China and the U.S. weighed on other countries that rely heavily on exports. The United Kingdom continues to struggle with Brexit, which creates a major distraction to economic activity. Overall, valuation of international shares remain less expensive than U.S. shares with a price to earnings ratio of 13.0x versus 16.4x for the U.S.
Latin America and Russian markets performed better than other parts of the world. The economies of Latin America and Russia are closely tied to oil markets. Energy related assets performed well in the first quarter, with West Texas Intermediate Oil prices rising above $60. This rise in oil prices was primarily driven by falling inventories due to a decrease in production by Organization of the Petroleum Exporting Countries (OPEC).
U.S. Sectors
Top performing U.S. sectors as reported by J.P. Morgan for the first quarter of 2019 by total return included Technology (19.9%), Real Estate (17.5%) and Industrials (17.2%). Laggards for the first quarter include Healthcare (6.6%), Financials (8.6%) and Basic Materials (10.3%). A sharp turnaround in the market opened the door for growth stocks to gain sharply versus more defensive sectors.
All major U.S. sectors achieved positive performance in the first quarter for the first time since the second quarter of 2014. Positive performance was primarily driven by a Federal Reserve announcement that called for a near-term halt to interest rate increases. Additionally, trade discussions between the U.S. and China showed signs of positive progress. Fourth quarter earnings growth remained positive, helping drive sector performance, particularly in technology.
Investors remain cautious regarding economic and earnings growth going forward. First quarter earnings results will have more difficult comparisons versus first quarter 2018. Tax rate advantages that corporations enjoyed in 2018 will no longer have the positive impact they did the past year. Current estimates call for negative year-over-year earnings growth.