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Friday, March 1, 2019

February 2019 - Monthly Market Commentary

February was a strong month for global risk assets as markets continued their recovery from the late 2018 selloff. Global equities rallied with small caps continuing to outperform, credit spreads tightened, and the oil complex rose. Minutes from the January Federal Reserve meeting indicated that Fed officials were preparing for an end to the balance sheet runoff; Chairman Powell’s Congressional testimony in late February confirmed this. The US GDP report showed that the US economy expanded at a 2.6% annual rate in the fourth quarter, ahead of analyst estimates of 2.2%, but below 3.2% third quarter growth and 4.2% second quarter growth. The US job report showed that 304,000 non-farm jobs were added in January (the 100th consecutive month of job creation), the unemployment rate rose to 4.0%, the labor force participation rate increased to 63.2%, and average hourly earnings rose 3.2% from a year earlier, the sixth straight month of gains above 3%.

Notable corporate transactions announced in February included the $218 million acquisition of Maxwell Technologies by Tesla, the $28 billion purchase of SunTrust by BB&T, the $900 million acquisition of Solium Capital by Morgan Stanley, the purchase of Precision Flow Systems by Ingersoll Rand for $1.5 billion, the $3.7 billion acquisition of Ellie Mae by Thoma Bravo, the $200 million sale of Luminate to Symantec, the $3.4 billion purchase of Auris Health by J&J, the $700 million acquisition of WorldFirst by Ant Financial, the $340 million acquisition of Gimlet and Anchor by Spotify, the $21 billion purchase of GE’s biotech business by Danaher, Roche’s $4.8 billion purchase of Spark Therapeutics, Symrise’s $900 million acquisition of ADF/IDF, the $11 billion purchase of Ultimate Software by a group led by Hellman & Friedman, Nutrien’s $340 million acquisition of Actagro, the $618 million purchase of Webroot by Carbonite, the $640 million purchase of Nexeo’s plastics distribution business by One Rock Capital, the $385 million acquisition of Endeavor Robotics by FLIR Systems, Amazon’s purchase of Eero for an undisclosed price, KDDI’s acquisition of a 49% interest in for $800 million, Greif’s $1.8 billion purchase of Caraustar, the $6.4 billion acquisition of Scout24 by Hellman & Friedman and Blackstone, Palo Alto’s $560 million purchase of Demisto, DP World’s $420 million acquisition of P&O Ferries, Tilray’s $318 million purchase of Manitoba Harvest, Pepsi’s acquisition of CytoSport, the $300 million sale of Immune Design to Merck, Qlik’s $560 million purchase of Attunity, the $2.5 billion sale of the plastic container business of Brambles to a group led by Triton, Platinum Equity’s $2.5 billion acquisition of Multi-Color, JAB’s $1.2 billion purchase of Compassion First Pet Hospitals, and Thoma Bravo’s $1.5 billion acquisition of ConnectWise.

Developed market equities rose in February (see page 8), with the biggest gains in Australia (+5.9%), Hong Kong (+5.9%), and France (+4.9%). US small caps outperformed large caps, with the Russell 2000 up 5.2% and the Russell 1000 up 3.4% (see page 3). IT (+6.9%), Industrials (+6.4%), and Utilities (+4.2%) were the best performing sectors in February; Consumer Discretionary (+0.8%), Communication Services (+0.8%), and Real Estate (+1.1%) were the worst performing sectors (see page 2). Large cap value (+3.2%) underperformed large cap growth (+3.6%) in February (see page 3). Emerging market equities were mixed in February (see page 9), with the largest gains in Taiwan (+4.9%), China (+3.5%), and Malaysia (+1.1%), and the largest losses in Argentina (-10.6%), Indonesia (-3.9%), and the Philippines (-3.5%).

In currencies, the USD Index was higher (+0.6%) in February (see page 10). The British Pound (+1.2%) gained against the USD, while the Australian Dollar (-2.5%), Japanese Yen (-2.3%), and Swedish Krona (-2.1%) had the largest losses. Emerging market currencies were mostly lower against the USD, with the largest gains in the Malaysian Ringgit (+0.8%), Indian Rupee (+0.2%), and Chinese Yuan (+0.1%), and the largest losses in the South African Rand (-5.9%), Turkish Lira (-3.3%), and Brazilian Real (-3%).

The US interest rate curve flattened in February at the short and medium end of the curve (see page 12). 10 year rates closed the month at 2.72%, up from 2.63% at January month end. US investment grade and high yield spreads tightened in February (see page 13).

In commodities, the GSCI index was up 3.8% in February (see page 11), with gains in Energy (+7.2%), Industrial Metals (+3.1%), and Livestock (+0.2%), and losses in Precious Metals (-0.8%) and Agriculture (-5%). Within individual commodities, Palladium (+16.5%), Gasoline (+13%), and Brent Crude (+9.2) saw the biggest gains, while Wheat (-11.3%), Coffee (-9.6%), and Lean Hogs (-7%) saw the biggest losses. Gold was down 0.5% for the month.

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