First Quarter 2019 Commentary

DATE:  April 1, 2019
FROM: David G. Dietze, JD, CFA, CFPTM, Founder and President
 

I.            Performance Update

·      The start of the year saw a massive reversal of stock market returns following the worst December since 1931. All assets outside of cash came out of the gates strong with most stock indices producing double-digit returns. Even bonds were positive, as interest rates eased during the quarter, driving bond prices up. Perceptions changed from a recession bound economy to growth oriented one featuring low inflation.  This is a Goldilocks environment for equities.

   MARKET DATA

 

     03/31/2018      

to

03/31/2019

 

First

Quarter

2019

S&P 500 (dividends reinvested)

9.50%

13.65%

NASDAQ (dividends reinvested)

10.65%

16.81%

60/40 S&P 500 / TX-EXEMPT SECURITIES BLEND

8.14%

9.29%

DOW JONES INDUSTRIALS (dividends reinvested)

10.01%

11.77%

INTERNATIONAL STOCKS (MSCI EAFE IX ID)

-3.58

9.97

TAXABLE BONDS (Barclay’s 1-3 Yr Gov’t/Credit)

3.04%

1.21%

TAX-EXEMPT SECURITIES (Barclay’s Muni Index)

5.40%

2.90%

 

·      The catalyst for the positive stock market reversal was the Federal Reserve.  In January it changed its December forecast of two rate hikes to no expected hikes for the year. Stocks, bonds, and gold all rallied on the news.

·      Perceptions about trade wars with China have changed as well. As of this note, no deal has yet to be achieved to end the trade wars, but rumors are that progress is being made between both sides.

·      More than 70% of the companies in the S&P 500 have once again outpaced Wall Street analysts’ expectations, although the pace of earnings growth has declined since the first three quarters of 2018.

·      However, volatility, which was quiet most of the quarter, percolated as the yield curve began to invert. Shorter maturities yielded more than the US 10 year Treasury. Based on history, equity investors started to brace for recession.

·      The Energy sector rallied quite strongly up 16.4%, outpacing the broader market.  Fossil fuel prices had their strongest start since 2009, climbing over 30%, after they fell nearly 50% during Q4 2018. Once again perceptions of a global recession were unfounded during the quarter.

·      Despite having solid long term fundamentals, Healthcare was the worst performing sector in the S&P 500, up 6.6% for the quarter. Fears on the regulatory front gave investors pause. Also, investors braced riskier, more cyclical stocks, like Industrials over the more traditionally defensive sectors, such as Healthcare.

·      On the global front, the Eurozone remains in flux. Brexit dominated headlines, but the result was the UK continuing to kick the can down the road. On the continental side, the EU economy continued to flounder, led by Italy. Many speculate the European Central Bank will need to restart the quantitative easing strategy it just completed.

PREVAILING YIELDS AS OF:

FIXED INCOME ASSET

3/31/18

6/30/18

9/30/18

12/31/18

03/31/19

US Government 10 Yr. Note

2.79%

2.85%

3.06%

2.69%

2.41%

5-Year Certificate of Deposit

1.67%

1.74%

1.89%

2.02%

2.02%

Money Market

1.32%

1.57%

1.75%

2.08%

2.13%

 

II.          Looking Forward

      The global economy is slowing, led by China and the EU. The Fed stands ready to act from a monetary policy standpoint if the US economy should slow. This continues to story that has pushed stocks higher for the past decade: T.I.N.A (There is No Alternative) to stocks is back in play.  We remain watchful on the signals from the bond market as the yield curve has been flat. Historically, an inverted yield curve (short term rates are higher than long term rates) has portended a recession fifteen to eighteen months out.  However, that does not mean a recession is imminent, nor does it mean stocks will slide into a bear market.  

 

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