Q1 2019 Financial Market Update
Updated: Jan 17, 2020
After sharp losses during the fourth quarter of 2018, the stock market rallied back during the first quarter of 2019, with the S&P 500 seeing its best first quarter since 1998.
Today, the market sits just a few points off its all-time high, with just a few pauses as investors digest conflicting opinions on the economy and markets. Stocks suggest a potential soft landing with a nearer term recovery, while bonds signal perhaps a different story as the yield curve flattens substantially, even inverting briefly (when the 10-year Treasury yield moves below the 3-month T Bill yield). Interest Rate Impact Trying to understand the rebound can be difficult. After multiple rates hikes and announcements of continued hikes, the Federal Reserve signaled a reversal in policy and indicated there would be more patience with economic data. The Fed has put interest-rate increases on hold which often pleases investors. Stocks frequently respond positively to lower rates, but this change in direction also signaled that the Fed is perhaps concerned about slower growth or inflation. Mixed economic data this year continues into the second quarter suggesting that while the economy is still growing, earnings will be negative for the S&P 500 in the first quarter at least in the short term. Brexit drama, China trade talks, and weakness around the globe will continue to weigh on investors’ minds. Mixed Economic Forecast As is often the case, there can be an argument for the market's continued strength or weakness. For those more optimistic, the labor market remains strong, with jobless claims recently hitting a 50-year low, while the March jobs report showed robust payroll gains, making the weak February report look more like an outlier. The unemployment rate remains at an historical low, although average hourly earnings surprisingly dipped on a year-over-year basis. In addition, the Institute for Supply Management’s (ISM) Manufacturing Index bounced in March, which is indicative of expansion and not contraction. This improvement likely reflects some optimism that a trade deal between the United States and China will be coming in the near term. Although there’s ample reason to keep enthusiasm curbed for a near-term comprehensive deal, it would likely remove a major source of concern for corporations as they plan ahead. The news is not all good as a more pessimistic view can be shaped from other recent releases. Retail sales in February fell from the previous month, durable goods orders fell, and orders for non-defense capital goods i.e. aircraft, considered a proxy for business spending, fell as well continuing their declining trend. In the midst of this mixed economic picture, first-quarter earnings season could have a large impact on stock market action over the next few weeks. With estimates currently at a -2.5% year-over-year growth, expectations are muted; but what’s equally important will be comments about the future outlook by corporate executives. Executives’ comments will allow investors to scrutinize corporate profits and help define opinions on whether declining profits are a minor shock, or evidence of a late-cycle economic slowdown. Stocks and bonds appear to be at a face-off with regard to the economic outlook, and there is merit to both views of the economy. Unless earnings comfortably surprise on the upside, with healthy corporate guidance, there is a risk that stocks will give back some of their recent gains. For the short term, it appears that most equities are at full valuations. The International Monetary Fund (IMF) Chief Economist, Gita Gopinath, recently stated that this is a delicate moment for the global economy. However, we know that throughout the beginning of 2019 and most of 2018, the United States has been a strong economic outlier, when compared to the rest of the global economy. Many thought that we were headed into a bear market and recession during the end of last year, yet we have seen big gains across the board this year; investors who fled the stock market and didn’t stick with their long-term asset allocation have missed out. Consistent Investment Strategy with Long-Term Perspective While this business cycle has persisted beyond many people's expectations, the economy is still growing. All this means is that this is a more difficult market environment, but history has told us time and time again that market timing does not work. Sharp reactions to short term moves in the market are not in our clients’ best interest. This is not the first time that we have been inundated with conflicting economic data and opinions, nor will it be the last. The macroeconomic factors flooding our news cycles do not change our core values of disciplined investing, with diversification, and a completely personalized asset allocation strategy tailored to each clients’ goals and risk tolerance. Cash is an important part of a diversified portfolio and we always want to ensure that our clients have adequate cash in their portfolios for balance and providing liquidity to meet their needs. We remain highly attentive to the economy and the markets, while remaining patient and focused on the long term. As always, we are available to address your concerns and answer any questions that you may have. Please contact me directly to discuss, or to schedule a time to review your portfolio. We appreciate your continued business and we look forward to hearing from you.