Markets & Economy

Monthly Market Review

January 2019
T. Rowe Price

After their worst monthly performance in almost a decade in December, the major indexes rebounded in January and nearly erased the previous month’s losses. The smaller-cap indexes outperformed, but the large‑cap indexes stood apart for moving within 10% of their highs, pulling them out of correction territory. Within the S&P 500 Index, the industrials and energy segments performed best, while the utilities and health care sectors lagged with more modest gains. Volatility, which had spiked to multiyear highs in December, moderated throughout the month.

Investors Keep A Close Eye On Trade Talks

Stocks began the month on a strong note, carrying through the momentum they had gained in the final days of 2018. Hopes that the U.S. and China might be making progress in trade talks seemed partly responsible for the positive sentiment. On January 7, three days of mid-level negotiations began, and investors seemed cheered by the surprise appearance of China’s vice premiere, Liu He, at the talks. President Trump also tweeted that the talks were “going very well.” Stocks got another brief boost the following week from reports that Treasury Secretary Steven Mnuchin had suggested lowering the tariff rates on some Chinese goods as a gesture of good will. The White House quickly denied the accounts, however.

Indeed, the trade picture darkened a bit late in the month. T. Rowe Price traders noted that an early rally was derailed on January 22, after the Financial Times reported that the U.S. had turned down a Chinese offer for preparatory trade talks. White House Chief Economic Advisor Larry Kudlow disputed the report late in the day, which helped stocks recover some of their losses. The following day, however, Commerce Secretary Wilbur Ross seemed to dampen sentiment once again by stating on CNBC that the U.S. and China were “miles and miles” away from an agreement.

“Doubly Dovish” Turn In Fed Policy Boosts Sentiment

By contrast, the monetary policy background brightened throughout the month, providing a considerable tailwind to sentiment. The S&P 500 scored its best daily gain for the month on January 4, after Federal Reserve Chairman Jerome Powell, taking questions at an economic conference, stressed that the Fed would not hesitate to respond with all the tools at its disposal to counteract an economic downturn or financial turmoil. Minutes from the Fed’s December meeting also encouraged investors, with policymakers citing their awareness of “concerns about downside risks evident in financial markets and in reports from business contacts.”

The Fed’s signals following its January 29–30 policy meeting also proved encouraging, helping send the S&P 500 Index to its second-biggest gain for the month. The central bank decided to keep rates steady, as was widely expected, but investors were cheered by an unexpectedly “doubly dovish” post-meeting statement. T. Rowe Price Chief U.S. Economist Alan Levenson noted that the statement removed all reference to further rate increases, suggesting that Fed officials will probably wait until at least June before taking any further action. The statement also called into question whether the Fed would continue to allow its balance sheet to shrink by not reinvesting a portion of its maturing holdings of long‑term Treasuries and mortgage-backed securities—a “wind down” that has slowly been removing liquidity from the financial system. Policymakers stated that they were “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”

U.S. Indexes
Total Returns

 

January

Year-to-Date

Dow Jones Industrial Average

 7.29%

 7.29%

S&P 500 Index

 8.01  8.01

Nasdaq Composite Index

 9.74

 9.74

S&P MidCap 400 Index

10.46

10.46

Russell 2000 Index

11.25

11.25

Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended January 31, 2019. The returns include dividends based on data supplied by third-party provider RIMES and compiled by T. Rowe Price, except for the Nasdaq Composite Index, whose return is principal only. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.

Positive Data Calm Slowdown Fears

Even as the Fed promised to be ready to help in the case of a sharp slowdown, economic data seemed to help calm fears that the expansion was in danger. On January 4, the Labor Department reported that employers had added 312,000 jobs in December, well above expectations and the fastest pace in nearly a year (although later revised significantly lower). Weekly jobless claims hit a new five-decade low during the month, and consumer spending continued to grow at a healthy clip—even as sentiment measures fell back a bit amid the partial government shutdown and recent market turmoil. Existing home sales plunged in December, but November new home sales (December figures were delayed because of the shutdown) surged at their fastest pace since 1992. Manufacturing data remained less encouraging, and Wall Street also seemed to struggle intermittently with discouraging economic data from overseas, particularly from China.

The fourth-quarter earnings reports that arrived in the second half of the month indicated a slowdown in profit growth from earlier in the year but still healthy gains for most companies. Late in the month, analysts polled by FactSet were anticipating that fourth-quarter profits for the S&P 500 as a whole had grown by 12.4% versus a year earlier, roughly half the pace in the first three quarters of 2018.

Disruption Likely To Widen The Gap Between Winners And Losers

Profit growth is almost certain to slow further in early 2019 as the year‑over‑year impact of the December 2017 corporate tax cuts rolls off and export markets in Asia and Europe cool somewhat. T. Rowe Price managers generally agree, however, that the select firms that are best leveraging innovation will continue to enjoy robust growth in earnings and revenues as they exploit new markets and seize share in existing ones. Indeed, the disruption caused by these innovators is likely to continue widening the gap between winning firms and losing ones, making careful stock selection increasingly important.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of February 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Developed non-U.S. equity markets rose in January but trailed U.S. shares, which rebounded sharply after suffering their worst loss in December since the 1930s. Ongoing trade tensions and worries about slowing global growth continued to weigh on investor sentiment, but a weaker U.S. dollar versus most currencies lifted returns to U.S. investors. Within the MSCI EAFE Index, all 11 sectors rose, led by real estate, information technology, and materials.

Growth stocks in the EAFE index gained 6.47%, trailing value shares, which returned 6.70%. Emerging equity markets rose, led by gains in Latin America, where stocks in Argentina and Brazil rallied 19.72% and 17.77%, respectively, as measured by MSCI indexes.

European Stocks Follow Global Shares Higher

Equities in Europe rose 6.61%, in line with the MSCI EAFE Index, despite ongoing uncertainty about U.S.-China trade negotiations, Brexit concerns, and Italy’s fall into recession.

Eurozone Economy Grows At Weakest Pace In Four Years

The European Union (EU) statistics agency reported that the eurozone economy grew by 1.8% in 2018, its weakest pace in four years. In addition to Italy’s standoff with the EU, the region’s economy was hit by a slowdown in exports, protests in France, and inventory backlogs in Germany’s automobile sector caused by new emissions standards. In Italy, preliminary data showed that the country’s economy fell into a recession in the last half of 2018. Gross domestic product contracted by 0.2%—more than consensus estimates—in the last three months of 2018, following a 0.1% drop in the third quarter. This is the third time in a decade that Italy has fallen into a recession, and the decline comes after a sharp increase in government borrowing costs and political uncertainty resulting from the euroskeptic government’s standoff with the EU over its budget plans.

International Indexes
Total Returns

MSCI Indexes

January

Year-to-Date

EAFE (Europe, Australasia, Far East)

6.59%

6.59%

All Country World ex-U.S.A.

7.57

7.57

Europe

6.61

6.61

Japan

6.10

6.10

All Country Asia ex-Japan

7.31

7.31

EM (Emerging Markets)

8.76

8.76

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, MSCI.
All data are in U.S. dollars as of January 31, 2019. This table is shown for illustrative purposes only and does not represent the performance of any specific security. MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Japanese Equities Rise

Stocks in Japan underperformed the broad EAFE index, with a 6.10% return for the month in U.S. dollar terms. The Tokyo-based Nikkei 225 Index rose as well, following U.S. and other global markets higher, despite ongoing concerns that a slowdown in China is hitting Japan’s export markets. Japan’s December exports experienced their largest year-on-year drop in more than two years on a sharp drop in demand from China, sending Japan’s trade balance for 2018 into the first deficit in three years.

Japanese Companies Seen Growing Earnings

According to Archibald Ciganer, a Tokyo‑based T. Rowe Price equity portfolio manager, Japanese companies will continue to generate earnings growth. However, he noted that the global economy remains a heavy influence on the Japanese economy. The Japanese manufacturing and technology sectors would be especially vulnerable to any significant disruption to Asian supply chains in the event of an intensified trade war between China and the U.S.

The BoJ Stands Pat On Monetary Policy

The Bank of Japan (BoJ) left unchanged its current monetary policy targets—a 10-year government bond yield of 0.0% (plus or minus 20 basis points), short-term interest rates of -0.1%, and a continuation of its ¥80 trillion per year bond-buying program. The policymaking body also agreed to maintain its annual buying of exchange-traded funds at ¥6 trillion and real estate investment trust purchases at ¥90 billion per year. The committee members lowered their economic growth forecast for fiscal year 2018 (which ends on March 31, 2019) to 0.9% to 1.0% from the earlier forecast of 1.3% to 1.5% and set a new target range for fiscal 2019 of 0.7% to 1.0%. The central bankers cut their core inflation forecast for fiscal 2019 to 0.9% from 1.4% largely because of the recent decline in oil prices. It marked the fourth downward revision for the 2019 inflation forecast since the BoJ’s initial estimate in April 2018.

Emerging Markets Outperform Developed Market Peers

Emerging markets stocks rallied in January, as a lull in the U.S.-China trade battle and unexpectedly dovish remarks by the Federal Reserve revived investors’ risk appetite. The MSCI Emerging Markets Index posted its best month since March 2016, according to Bloomberg, and the index hit its highest level of the month at the end of January after the Federal Reserve said it would be “patient” before hiking U.S. interest rates any further. The Fed’s comments, which came a month after the central bank had signaled tighter policy in 2019, raised optimism that capital flows into developing markets would continue. All 11 sectors in the MSCI Emerging Markets Index rose, led by consumer discretionary stocks, which added 13%. Materials stocks rose the least, gaining nearly 5%.

The MSCI EM Latin America Index rose 14.96% for the month, as the region outperformed other emerging regions. Rallies in Argentina and Brazil led the gains. Argentina’s shares rose almost 20%, and Brazilian equities were up almost 18%, as investors bet that the administration of newly elected President Jair Bolsonaro would overhaul Brazil’s pension system and push through market-friendly reforms.

The Europe, Middle East, And Africa (EMEA) Region Rose 10.81%

Rallies in Turkish, South African, and Russian stock markets led the EMEA region. Turkish stocks climbed nearly 18%, aided by a period of calm for the lira and relatively cheap stock valuations. Russian stocks added almost 14% as talk of U.S. sanctions subsided and prices surged for crude oil, the country’s chief export. South African stocks surged roughly 12% as the rand gained more than 8%—the most among emerging markets currencies as investors bet that the country’s economy will turn around in 2019. South Africa’s central bank kept its key interest rate at 6.75% and lowered its inflation projections until 2021 due to lower oil prices and a stronger currency, though it added that upside inflation risks remained.

Outlook: Global Growth Is Slowing

We expect global growth to moderate against the backdrop of ongoing trade tensions, slowing Chinese demand, and geopolitical disrupters, including policy uncertainty in Italy and, to some extent, in France, as well as uncertain Brexit negotiations. Trade-driven economies may be the hardest hit going forward. A continuation of trade tensions could exacerbate this slowdown, while Chinese monetary and fiscal stimulus have the greatest potential to drive global growth higher. Lower oil prices should give growth a boost among oil importers, including Europe, China, and India. While some of the political risks that had hung over emerging markets countries, such as elections in Brazil and Mexico and severe currency weakness in Turkey, have eased, myriad geopolitical and trade issues remain that could spark risk-related selling and derail markets. Other challenges to the outlook for global equities include the possibility of central bank policy missteps and the rising popularity of anti-establishment and populist political parties.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of February 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Treasury yields decreased in January after the Federal Reserve indicated that it would be patient before hiking rates further. The benchmark 10‑year Treasury note’s yield climbed as high as 2.79% as investors sold safe-haven government debt in favor of riskier assets. However, the Fed’s dovish statement at the end of its January 29–30 monetary policy meeting sparked a widespread rally in stocks and bonds and sent the 10-year yield down to 2.63% by the end of the month. The yield difference between 2- and 10-year Treasuries, the most closely watched segment of the yield curve, narrowed from 0.21 percentage points to 0.18 percentage points during the month. Bond prices and yields move in opposite directions.

Fed Announces Patient Approach To Future Rate Increases

As expected, the Fed declined to raise rates in January, but its post‑meeting statement reflected notable changes from its December 2018 meeting. Citing recent economic and financial developments and low inflation, the central bank policymakers removed language about the need for further gradual rate increases and added wording saying that they would be “patient” as they assess future changes to policy, implying that rate adjustments could be in either direction.

The Fed also issued a statement that called into question whether it would continue to allow its balance sheet to shrink by not reinvesting a portion of the proceeds of its holdings of Treasuries and mortgage-backed securities (MBS)—a policy that has slowly been removing liquidity from the financial system. Policymakers stated that they were “prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments.”

Rise In Stock, Oil Prices Contributes To High Yield Rally

Riskier areas of fixed income rallied after Fed Chairman Jerome Powell indicated early in the month that the central bank might be taking a more dovish approach to monetary policy. High yield bonds bounced back from December’s sell-off and recorded strong results. The sector was supported by the stock rally and rising oil prices that improved the prospects of energy-related issuers. Technical factors were also beneficial. Flows into high yield funds turned positive after seven weeks of outflows, and, according to T. Rowe Price traders, reinvestments from coupon payments increased demand. A six‑week issuance drought ended when energy company Targa Resources sold USD $1.5 billion of new bonds on January 10, but demand continued to outpace supply.

Total Returns

Index

January

Year-to-Date

 

Bloomberg Barclays U.S. Aggregate Bond Index

 1.06%

 1.06%

 

J.P. Morgan Global High Yield Index

 4.28

 4.28

 

Bloomberg Barclays Municipal Bond Index

 0.76

 0.76

 

Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index

 1.86

 1.86

 

J.P. Morgan Emerging Markets Bond Index Global Diversified

 4.41

 4.41

 

Bloomberg Barclays U.S. Mortgage Backed Securities Index

 0.79

 0.79

 

Past performance is not a reliable indicator of future performance.
Figures as of January 31, 2019. This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Source: Third-party vendor RIMES. Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission. Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Corporate Bonds Lead U.S. Investment-Grade Market

Investment-grade corporate bond returns lagged their high yield counterparts but were the strongest segment of the Bloomberg Barclays U.S. Aggregate Bond Index. Investment-grade corporates benefited from many of the same factors that boosted high yield bonds, including a pickup in demand. Anheuser-Busch InBev surprised the market with a USD $15.5 billion bond deal that the giant brewer intends to use to refinance some of its existing debt, but new issuance for the month was generally lower than expected. Mortgage-backed securities rallied at month-end after the Fed indicated that it might hold more MBS than expected on its balance sheet.

Tax-free municipal bonds lagged the broad U.S. investment-grade taxable bond market but outperformed Treasuries. Munis were supported by solid inflows, limited new issuance, and reinvestment of coupon payments.

Developed Markets Currencies Generally Strengthen Against U.S. Dollar

Bonds in developed non-U.S. markets generated positive returns in dollar terms, as a weaker U.S. dollar versus most currencies boosted returns. UK government 10-year bond yields climbed to their highest level since early December in the wake of Parliament’s strong rejection of the UK government’s Brexit withdrawal agreement but finished the month little changed. The British pound gained more than 3% against the U.S. dollar for the month. The Bank of Japan left its accommodative monetary policy unchanged, as expected, but the bank revised downward its inflation forecasts for 2019.

U.S. Treasury Yields

Maturity

December 31

January 31

3-Month

2.45%

2.41%

6-Month

2.56

2.46

2-Year

2.48

2.45

5-Year

2.51

2.43

10-Year

2.69

2.63

30-Year 3.02 2.99

Source: Federal Reserve Board.

Emerging Markets Bonds Rebound With Strong Results In Turkey, Venezuela

Emerging markets bonds produced strong gains, supported by significant inflows, as the asset class continued to rebound from weakness in 2018. In country‑specific developments, Turkey’s central bank elected not to cut rates, easing concerns that it could backtrack on efforts to promote price stability through tighter monetary policy. The bank’s decision helped fuel a rally in the lira and the country’s long-term bonds. Venezuelan debt also surged after opposition leader Juan Guaido declared himself interim president, raising hopes for a new regime that would better position the country to repay bondholders.

Outlook: Local Currency Emerging Markets Bonds Offer Potential

Some members of the T. Rowe Price global investment team believe that locally denominated emerging markets bonds offer a potentially attractive way to invest in the current environment. A more accommodative Fed, together with a stabilization in the U.S. dollar, could give emerging markets central banks some room to ease monetary policy instead of defending their currencies against depreciation against the dollar. China, in particular, stands out in this regard—the Chinese economy continues to slow at a time when inflation pressures have receded, yet the Chinese central bank has so far been reluctant to cut interest rates due to the downward pressure on the currency versus the U.S. dollar.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of February 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Major U.S. stock indexes surged during the first month of 2019­—paring deep losses from last year’s fourth quarter—as market volatility eased considerably compared with December. Hopes that China and the U.S. would resolve their trade dispute drove market sentiment for much of the month. Early in January, speculation grew that the recent market downturn increased pressure on the White House to finalize a trade deal. Talks with China seemed to lose steam later in the month, as Commerce Secretary Wilbur Ross indicated that the U.S. and China were “miles and miles” away from a trade deal. The partial federal government shutdown that started before Christmas lasted for most of the month, but a late-January deal to reopen the government for three weeks lifted investor sentiment. During the three-week time frame, congressional leaders are expected to work on a longer-term solution for border security.

Through the end of January, close to half of all S&P 500 companies reported their fourth-quarter earnings, and, according to FactSet, 70% of those have reported a positive earnings surprise. Also, at the end of January, the Federal Reserve held a two-day monetary policy meeting; as expected, the central bank kept short-term interest rates unchanged. However, investors were cheered by an unexpectedly dovish post-meeting statement, in which Fed officials expressed their willingness to be “patient” before adjusting monetary policy. T. Rowe Price Chief U.S. Economist Alan Levenson noted that the statement removed all reference to further rate increases, suggesting that Fed officials could wait at least until June before raising rates again.

Small-cap shares outperformed mid- and large-caps. The small-cap Russell 2000 Index returned 11.25% versus 10.46% for the S&P MidCap 400 Index and 8.01% for the large-cap S&P 500 Index. As measured by various Russell indexes, growth stocks outperformed value stocks across all market capitalizations.

U.S. Stock Returns
  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index

January

8.01%

10.46%

11.25%

Year-to-Date

8.01 10.46 11.25

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, as of January 31, 2019.
Note: Frank Russell Company (“Russell”) is the source and owner of the Russell Index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
The S&P 500 Index and S&P MidCap 400 Index are products of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”) and have been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index and S&P MidCap 400 Index.

In the large-cap universe, as measured by the S&P 500 Index, all sectors produced positive returns. Industrials and business services stocks were the top performers as optimism that the U.S. and China may reach a trade deal benefited the sector. Also, a generally weaker U.S. dollar against other currencies provided a boost to export-oriented companies, such as aerospace and defense firms. Energy shares bounced back from their recent decline and posted very strong returns, as the sector was buoyed by rising oil prices. News that Saudi Arabia and other OPEC nations had cut production in December—one month before a formal production cut agreement was to be implemented—helped support the oil market. Real estate, communication services, and consumer discretionary companies also posted very strong returns and outperformed the index. Utilities stocks, which held up well during the market’s fourth-quarter downturn, lagged with mild gains as investors favored higher-risk sectors. The defensive health care and consumer staples sectors also underperformed the broad market.

Domestic investment-grade bonds produced positive returns as Treasury interest rates edged lower and higher-risk assets rebounded from late-2018 losses. The Bloomberg Barclays U.S. Aggregate Bond Index returned 1.06%. In the investment-grade universe, corporate bonds produced the best returns. Asset- and mortgage-backed securities yielded modest positive returns. Tax-free municipal bonds appreciated slightly but modestly underperformed the taxable bond market. High yield bonds soundly outperformed investment-grade issues as credit spreads narrowed and energy sector bonds rallied with oil prices.

U.S. Bond Returns
  Bloomberg Barclays
U.S. Aggregate Bond
Index

Bloomberg Barclays
Municipal Bond Index

JPMorgan Global
High Yield Index

January

 1.06%

 0.76%

4.28%

Year-to-Date

 1.06

 0.76

4.28

Past performance is not a reliable indicator of future performance. 
Source: Third-party vendor RIMES, as of January 31, 2019.
Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Stocks in developed non-U.S. equity markets yielded positive returns, but underperformed U.S. shares. The MSCI EAFE Index—which measures the performance of stocks in Europe, Australasia, and the Far East—returned 6.59%. Developed Asian markets were positive, with Hong Kong and Australia leading the way, posting returns of over 7% for the month. Japanese shares rose more than 6%, as the yen appreciated close to 1% versus the dollar. European stock market returns were also positive, with Belgian stocks leading the way, returning almost 10%. Shares in Germany and France rose roughly 7% and 6%, respectively, despite global trade fears weighing on each economy. Data released during the month showed German exports declined, and industrial production also fell unexpectedly. The French economy continued to suffer from the effects of the “yellow vest” protests. French President Emmanuel Macron addressed the nation on New Year’s Day and vowed to push ahead with reform aimed at boosting growth and lowering the country’s high unemployment rate. In the UK, British shares rose about 7%, as Prime Minister Theresa May’s government survived a no‑confidence vote after her Brexit deal was tremendously rejected by a 432 to 202 vote in the House of Commons. While the prime minister hopes to reopen negotiations with the European Union (EU) over the terms of the UK withdrawal, the EU has indicated that it is unwilling to reconsider those terms. The UK is scheduled to leave the EU in late March.

Emerging markets stocks outperformed developed non-U.S. markets. The MSCI Emerging Markets Index returned 8.76%. In emerging Europe, Turkish shares surged almost 18% in dollar terms as the lira appreciated about 3% against the greenback. Turkish assets were supported by the central bank’s decision not to raise short-term interest rates, as well as data showing that Turkey’s inflation was easing from its peak of about 25% in October. Russian shares rallied nearly 14% in dollar terms as stocks benefited from a rebound in oil prices, and a 6% gain in the ruble boosted returns to U.S. investors. Emerging Asian markets were widely positive. Chinese stocks rose over 11%, and the A‑share market advanced almost 9% amid hopes that the U.S. and China would reach a trade deal before March 1, when the 90-day tariff truce ends and the U.S. plans to raise the tariff rate on certain Chinese goods from 10% to 25%. Shares in Thailand, South Korea, the Philippines, and Indonesia also advanced strongly for the month. In Latin America, shares rallied broadly. Frontier market Argentina led the region, posting returns of nearly 20%. Brazilian shares surged almost 18%. New president Jair Bolsonaro officially took office on January 1, and equities were propelled by expectations that he would quickly pursue business-friendly policies and pension reform. Stocks in Colombia and Chile appreciated roughly 14% and 12%, respectively. Mexican shares advanced almost 10%.

Non-U.S. Stock Returns
  MSCI EAFE Index MSCI Emerging Markets Index

January

6.59%

8.76%

Year-to-Date

6.59

8.76

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, as of January 31, 2019.
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Bonds in developed non-U.S. markets generated positive returns in dollar terms, as a weaker U.S. dollar versus several currencies boosted local returns to U.S. investors. In Europe, bond yields generally declined, as European Central Bank President Mario Draghi acknowledged that the outlook for the eurozone economy had deteriorated since December and suggested that the central bank will have to keep its monetary policy stance loose to help the region’s economy out of its slump. Japanese bond yields were little changed as the Bank of Japan (BoJ) made no changes to its current monetary policy targets―a 10-year government bond yield of 0.0% (plus or minus 20 basis points), short-term interest rates of -0.1%, and a continuation of its ¥80 trillion per year bond-buying program. The BoJ did cut its core inflation forecast for 2019 to 0.9% from 1.4%, largely due to the sharp decline in oil prices late last year.

Emerging markets debt strongly outperformed developed markets bonds. Local currency bonds outpaced dollar-denominated emerging markets debt. Most major emerging markets currencies appreciated significantly versus the dollar, including the South African rand, Brazilian real, and Russian ruble, which helped increase local bond market returns to U.S. investors. Venezuelan fixed income assets rose sharply from deeply distressed levels amid speculation that there may soon be a resolution to the political standoff between two individuals claiming to be the country’s legitimate president. The two individuals are Nicolas Maduro, who was reelected in a May 2018 election that many claim was marked by fraud and irregularities, and Juan Guaido, the head of the democratically elected National Assembly who recently declared himself interim president. If Maduro steps down, the change in government could be a precursor to a formal debt restructuring.

Non-U.S. Bond Returns
  Bloomberg Barclays
Global Aggregate
Ex-U.S. Dollar Bond
Index

JPMorgan Emerging
Markets Bond
Index Global
Diversified

JPMorgan GBI-EM
Global Diversified
Index

January

1.86%

4.41%

5.46%

Year-to-Date

1.86

4.41

5.46

Past performance is not a reliable indicator of future performance.
Source: Third-party vendor RIMES, as of January 31, 2019.
Bloomberg Index Services Ltd. Copyright © 2019, Bloomberg Index Services Ltd. Used with permission.
Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of February 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Emerging markets stocks rallied in January as a lull in the U.S.‑China trade battle and unexpectedly dovish remarks by the Federal Reserve revived investors’ risk appetite. The MSCI Emerging Markets (EM) Index posted its best month since March 2016, according to Bloomberg, while an index of developing world currencies posted its biggest gain in a year. Trade officials from the U.S. and China held talks in Beijing and Washington as both countries worked to broker an agreement before a 90‑day tariff truce ends March 1, when the Trump administration is set to hike tariffs on Chinese imports. Though no breakthrough materialized, both sides cited progress in negotiations. Emerging markets stocks hit their highest level of the month at the end of January after the Federal Reserve said it would be “patient” before hiking U.S. interest rates any further. The Fed’s comments, which came a month after the central bank had signaled tighter policy in 2019, raised optimism that capital flows into developing world assets would continue. All 11 sectors in the MSCI EM Index rose, led by consumer discretionary stocks, which added 13%. Materials stocks rose the least, gaining nearly 5%.

Total Returns
MSCI Index January Year-to-Date
Emerging Markets (EM)  8.76%  8.76%
EM Asia  7.33  7.33
EM Europe, Middle East, and Africa (EMEA) 10.81 10.81
EM Latin America 14.96 14.96

Past performance is not a reliable indicator of future performance. 
All data are in U.S. dollars as of January 31, 2019. This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Source: MSCI.
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Chinese Stocks Gain On Trade Agreement Hopes; Indian Stocks Decline As Electoral Uncertainty Rises

  • Chinese stocks rallied as successive rounds of trade talks between U.S. and Chinese officials raised hopes for an end to a bruising trade war that is increasingly weighing on China’s growth. China reported its economy grew 6.4% year‑on‑year in the final quarter of 2018 and 6.6% for the full year. The fourth‑quarter pickup marked China’s slowest growth pace since the global financial crisis about a decade ago, while the full‑year growth marked its lowest annual expansion since 1990.
  • Indian stocks shed nearly 2% and the rupee weakened amid heightened uncertainty ahead of national elections likely to be held by early May. Recent polls have suggested that the government of Prime Minister Narendra Modi, who once looked unbeatable, faces a close race amid persistent joblessness and other signs of economic weakness.
  • Southeast Asian stocks advanced, led by Thailand’s nearly 10% gain. Central banks in Indonesia and Malaysia left their respective benchmark interest rates unchanged in January, while monetary authorities in the Philippines and Thailand are due to meet on their respective policy rates in February.

Brazilian Stocks Surge On Reform Hopes; Andean Stocks Rise On Commodity Outlook

  • Mexican stocks advanced nearly 10%. Mexico’s economy slowed in the fourth quarter of 2018, according to the official preliminary estimate, weighed by a decline in industrial output. The country’s gross domestic product expanded 0.3% in the December quarter, down from 0.8% growth in the third quarter, in seasonally adjusted terms. For the year, Mexico’s economy grew 2.0% compared with 2017’s expansion rate of 2.1%.
  • Brazilian stocks rallied almost 18% and the domestic Ibovespa index rose to record levels as investors bet that the administration of newly elected President Jair Bolsonaro would overhaul Brazil’s pension system and push through other market‑friendly reforms.
  • Stocks in Chile, Colombia, and Peru gained on hopes that an end to the U.S.‑China trade war would remove a headwind to global growth and boost demand for the region’s commodity‑driven economies. Chile’s central bank raised its benchmark lending rate by 25 basis points to 3.00%, but central banks in Peru and Colombia left their respective rates unchanged.

Turkish Stocks Rally As Lira Stabilizes; Russian Stocks Climb As Oil Prices Rebound

  • Turkish stocks climbed nearly 18%, aided by a modest gain in the lira and relatively cheap stock valuations. Turkey’s central bank left its benchmark interest rate on hold for the third straight meeting at 24% and the bank’s governor said at month‑end that the central bank would keep monetary policy tight until he saw a “convincing” slowdown in inflation, reassuring investors who had worried about the institution’s inflation‑fighting credibility.
  • Russian stocks added almost 14% as talk of U.S. sanctions subsided and prices surged for crude oil, the country’s chief export. Brent crude oil futures rose 15% for the month, the biggest monthly gain since April 2016, due to production cuts pledged by OPEC in December and Venezuela’s curtailed production stemming from its economic crisis.
  • South African stocks surged roughly 12% as the rand gained more than 8%, the most among emerging markets currencies, as investors bet that the country’s economy will turn around in 2019. South Africa’s central bank kept its key interest rate at 6.75% and lowered its inflation projections until 2021 due to lower oil prices and a stronger currency, though it added that upside inflation risks remained.

Solid Fundamentals In Emerging Markets Offset Near‑Term Risks

We are optimistic about the longer‑term outlook for emerging markets. Most developing countries have smaller current account deficits, larger foreign exchange reserves, and more flexible currencies than they did in previous decades, reducing the risk of a financial crisis. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption. Emerging markets stocks are attractively valued relative to developed markets stocks.

Near‑term headwinds include an escalation in global trade disagreements and an aggressive pace of monetary tightening by the Federal Reserve. However, we believe that emerging markets will be able to withstand a gradual tightening of U.S. monetary policy given that their financial positions have broadly improved in recent years. Economic growth is stable in most markets, and corporate earnings have recovered after years of disappointing performance. Nevertheless, we believe that careful stock selection will be crucial for producing good long‑term returns as emerging markets continue to show wide dispersion in the performance of individual countries and companies.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of February 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Next Steps: