During the first quarter of 2019 stock markets rallied around the globe, reclaiming much of the previous quarter losses. The spectacular rebound was a mirror image of the sharp fourth quarter declines experienced late last year. Stocks rallied as the Federal Reserve turned 180 degrees to become more dovish regarding interest rate hikes, and optimism increased with renewed expectations of a coming trade deal with China. Investors looked past weakening economic data and earnings around the globe, even as the Treasury yield curve ‘inverted’, where longer term rates fell below the rates of Treasuries with the shortest maturities, adding new concerns for the health of this aging bull market.
As macro-economic optimism began to grow and fears dissolved, equities achieved more return during the quarter than most analysts expected for the entire year. The S&P 500 rose nearly 14% while developed international and emerging markets added 10%. Even the conservative Bloomberg Barclay’s US Aggregate index returned 2.09% for the quarter. The U.S. economy actually expanded by a 2.2% annualized rate during the fourth quarter, propelled by strong consumer spending.
In addition to putting the brake on interest rate hikes, the Federal Reserve floated plans to slow down the reduction of its balance sheet and signaled their restrictive quantitative tightening may end in September 2019. As these data dependent plans become real, it should be a positive development for equities and other risk assets.
Meanwhile China is attempting to resuscitate its economy through fiscal and monetary stimulus. The ultimate likelihood of a trade agreement between the U.S. and China, and a dovish turn in the monetary policies of the U.S. Federal Reserve all should help equities grind their way higher in the months ahead.
As for the Eurozone, markets seem to be sanguine over a never-ending Brexit saga. Over the course of three days in early March, the British Parliament voted against the current deal that Prime Minister Theresa May negotiated with the European Union; voted against a “no-deal” Brexit; then voted to delay Brexit, which was scheduled to occur at the end of March.
However, with bull markets there always exists a bear case. Today, there’s no denying that a synchronized global growth slowdown is underway and a quiet market topping process may be occurring in this late cycle. While equity markets have celebrated changes in central bank and trade policy, it has been remarkable to watch a wide disconnect develop between global economic data and stock market growth. Reviewing a history of market cycles, odds would favor the market running into heavy resistance and then sliding back again, even testing the previous December lows as part of a bottom confirming process.
Regardless of challenges, we remain cautiously optimistic in the near term. The strong advance enjoyed by U.S. stocks is not likely to continue at the same pace. We may need evidence that global economic activity is firming before stocks can make new gains. While global manufacturing is beginning to stabilize, it may take time for additional economic data to improve. In any case, we feel the odds of an economic acceleration this year are better than the odds of a recession.
The plunge in the stock market during the late fourth quarter and subsequent bounce-back in the first quarter of this year is a reminder that one should always expect the unexpected when it comes to investing. We continue to conduct a dynamic investment process, identifying the asset classes across the globe that may be poised to enter a period of outperformance or underperformance, while limiting potential portfolio drawdowns.
On a personal note as we are refreshed by a new spring season, hoping you are enjoying some brighter sunny days and taking more time for what matters most. For us, our family will be celebrating Easter this weekend which always recalibrates my faith, hope, and purpose.
It is a pleasure to work with you toward your financial goals. If you have any questions about your portfolio, your financial plans, or if you have any life changes we should be aware of, please give us a call at 1-800-KGA-4916.
Eric W. Kendrick, CFP