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Market Commentary

A Strong Start to 2019

By John Packs, Senior Investment Officer, VALIC Funds

The year began with one of the strongest equity market rallies in recent history. The S&P 500 gained more than 13% in the first quarter with all sectors delivering positive returns. The 10-Year Treasury yield began the year at 2.68% and ended the quarter at 2.41%, raising returns of the fixed income markets.

These returns were facilitated by the Federal Reserve (the “Fed”) clearly going on pause with respect to further interest rate increases. Citing concern over global growth and trade policy uncertainty, the Fed reiterated that future interest rate policy would be data dependent. There are varying opinions in the market on whether the Fed will take any interest rate action this year and, if so, whether that move would be a rate increase or a rate cut.

The U.S. Treasury yield curve briefly inverted toward the end of the quarter, which is when short-term rates are higher than long-term rates. This increased concern that an economic slowdown was on the horizon. A disappointing jobs report in February, among other economic data points, served to reinforce this belief. However, the strong jobs report in March showing an increase of 196,000 jobs helped to allay these fears. Moreover, wage gains fell short of estimates, reassuring market participants that inflation remains in check.

Equity Markets

The core U.S. equity markets rebounded after steep declines in the last quarter of 2018. The S&P 500 returned 13.65%, the Russell Mid Cap Index returned 16.54% and small caps, as represented by the Russell 2000 Index, returned 14.58%. Overseas, the markets also improved: the MSCI EAFE Index returned 9.98% and the MSCI Emerging Markets Index returned 9.91%.

All sectors within the S&P 500 posted positive returns. Only Health Care and Financials had less than double digit returns, at 6.50% and 8.56%, respectively. Information Technology saw the largest gains at 19.86%.

Every major Lipper domestic mutual fund category saw double digit gains for the quarter. Mid- and small-caps performed higher than large-caps and growth outperformed value. Returns ranged from the Lipper Large Value Index, which returned 11.61%, to the Lipper Small Growth Index, which returned 18.93%. 

Fixed Income 

The fixed income market was positive for the quarter with the Bloomberg Barclay’s Aggregate Bond Index returning 2.94%. Within the broad asset class, returns ranged from the Bloomberg Barclay’s US Government Index returning 2.10% on the low end to riskier assets at the top with the FTSE High Yield Market Index returning 7.36%. The Bloomberg Barclay’s US Treasury Long Index returned 4.67%.

The S&P 500 Index is a representative sample of leading companies in leading industries reflecting the U.S. stock market. Russell MidCap Index measures performance of the 800 smallest companies in the Russell 1000 Index, representing 35% of total market capitalization of the Russell 1000 Index. Russell 2000 index measures performance of 2,000 small-cap companies in the Russell 3000 Index, comprising 3,000 biggest U.S. stocks. Morgan Stanley Capital (MSCI EAFE) Index tracks performance of 900 securities listed on stock exchanges of 21 EAFE countries. MSCI EM Index measures equity market performance in global emerging markets. Lipper Large Value Index tracks performance of the 30 biggest (asset size) funds, within Lipper's Large-Cap Value Category. Lipper Small Growth Index tracks performance of the 30 biggest (asset size) funds in Lipper's Small-Cap Growth Category. Barclays Capital U.S. Aggregate Bond Index measures investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. Barclays U.S. Treasury Long Index measures performance of public obligations of the U.S. Treasury, including securities roll up to the U.S. Aggregate, U.S. Universal, and Global Aggregate Indices. Bloomberg Barclays U.S. Credit Index measures investment grade, U.S. dollar-denominated, fixed-rate, taxable corporate and government-related bond markets. FTSE High Yield Market Index is a U.S. dollar-denominated index measuring performance of high-yield debt issued by corporations domiciled in U.S. or Canada. Indexes are not managed, have no identifiable objectives and can’t be purchased.

Past performance does not guarantee future performance of any investments. This commentary is provided for general informational purposes only and does not represent a recommendation or solicitation for any financial transaction.