The long, painful market decline in the last month of 2018 seemed to promise more of the same for the new year of 2019, but at the end of the first quarter, the results couldn’t have been more different. The U.S. market, measured by a variety of indices, posted its biggest one-quarter gain since the third quarter of 2009. This proves once again (as has been proven many, many times over) that you cannot extrapolate market returns from one month to the next, or expect that down or up trends will lead to more of the same.
Just about every investment asset rebounded first quarter of 2019. Looking at US Equities, the S&P 500 index of large cap stocks posted a gain of 13.07%, while small cap stocks gained 14.58% as measured by the Russell 2000 Index. The technology-heavy Nasdaq Composite Index gained 16.49%.
International investors are experiencing somewhat smaller gains. The broad-based EAFE index of companies in developed foreign economies gained 9.04%, while emerging market stocks of less developed countries 9.56% in dollar terms, as represented by the EAFE EM index, gained
In the bond market recently, there have been short periods of an inverted yield curve, where short term rates are higher than long term rates. Historically, this has been looked at as a sign of recession approaching. However, there have also been many “false alarms” where the inverted yield curve did not result in a recession. That detail is often overlooked.
Why are stock prices rising despite concerns about the yield curve inversion and persistent predictions of an upcoming recession? The answer could lie in some pleasant surprises that were contrary to what many investors were expecting. The Federal Reserve Board startled long-term market observers, in a good way, when it abandoned plans to continue hiking interest rates. Higher rates are considered impediments to higher market valuations for two reasons: they create more competition in the form of bond yields, and they raise borrowing costs for companies looking to expand.
So, what lies ahead? The next few months will see many companies post their first quarter earnings per share and the prospect of slowing growth estimates could chill the market. Nevertheless, slower profit growth is still growth, which suggests that a recession is not on the immediate horizon. Economists are still reluctant to predict an economic downturn fundamental remain strong and unemployment is at record lows. Many are watching the new round of U.S.-China trade negotiations, hoping for a breakthrough that would re-integrate disrupted corporate supply chains around the world.
It’s always best to be cautious when the markets are rising fast, and optimistic when stocks go on sale. Actually, doing these things is counterintuitive and very difficult emotionally, but for the intrepid, it has historically been a winning investment strategy.
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Wilshire index data: https://www.wilshire.com/indexcalculator/index.html
Russell index data: http://www.ftse.com/products/indices/russell-us
Nasdaq index data:
International indices: https://www.msci.com/end-of-day-data-search
Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci
Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/