U.S. equities rebounded from a weak close of 2018 to post significant gains in the first quarter of 2019. Despite a plethora of talk about a global economic slowdown, American investors remained confident as the Federal Reserve confirmed it would adjust planned interest rate hikes and the U.S. government shutdown ended. As a result, the Dow Jones Industrials Average, Nasdaq, Russell 2000 and S&P 500 Index all gained more than 10% during the first three months of the year, posting the best quarter in nearly a decade. Every sector of our domestic economy rose during this quarter. Equity gains were widespread with growth stocks marginally outperforming their value counterparts. Cyclical stocks were the strongest performers, led by technology, which suffered the most during the pullback of the last quarter of 2018, while healthcare generated more muted gains due to uncertainty over potential regulatory changes. Financials trailed the overall market, hindered by the Fed’s comments on rate trajectory. Global equities were almost as positive as domestic, with MSCI EAFE Index posting a solid 10% return for the quarter. This stock market rebound came despite economic and financial uncertainty and significant declines in estimates of corporate earnings. U.S. stocks started the first quarter with forward price/earnings ratios at the lowest levels since 2013, and ended with them close to average levels. The stock market, in this sense, was saying that things have returned to normal.
Low inflation and the Federal Reserve’s holding the line on interest rates helped push up prices for bonds, and pull the yields down. The Barclay U.S. Aggregate Bond Index returned 2.9%, for its best performance in three years, as a result of a drop in the yield on the 10-Year Treasury bonds from 2.7% at the end of the last year to 2.4% by the end of March of 2019.
The downward GDP growth revision for the last quarter of 2018 and lowered forecast for growth in 2019 intensified the talk about an imminent economic slowdown. These speculations were kept afloat by relatively weak consumer spending data in January. However, by the end of the first three months of the year, it has become clear that the economy is not cooperating with the pessimists. The jobs report for the last week of the first quarter showed a strong rise in payrolls and acceleration in hourly earnings. New claims for unemployment insurance dropped to the lowest readings since 1969 and the unemployment rate settled at the near half century low. Auto sales for both light trucks and cars increased in March and new single-family home sales surged at the fastest rate in almost a year. The ISM Manufacturing and Non-Manufacturing Indexes stayed above their average levels since the economic expansion began in mid-2009, almost ten years ago. While none of those reports mean that the economy is booming like it did in the mid-1980s or late 1990s, they clearly show that our domestic economy is not slipping into a recession.
The most important economic event in the quarter was the Fed’s change to a more dovish tone for monetary policy. We started the year expecting at least two rate hikes in 2019, but following the March policy meeting, the Fed Chairman suggested that rates may be on hold for many months due to the mild inflation and a sharp pullback in financial markets last year. The Fed’s decision to hold rates steady was, in part, influenced by the lowered prospects of global growth cited by the IMF (International Monetary Fund). While the U.S. economy has been resilient, the outlook dimmed elsewhere around the world pushed the Fed and other world central banks to have a more cautious approach to monetary policy.
A softened growth outlook briefly led to an inversion in the spread between 3-month and 10-year U.S. Treasury yields. Past inversions, when prolonged, have been reliable indicators of recession in the year ahead. However, we were encouraged to see this one was short lived.
So what does it mean to the investor? With the American economy being the envy of the world, the American consumer presenting a driving positive force, low unemployment rates and improving wages, and any forecasts for a recession at least more than a year in the future, the stock markets should produce comfortable, albeit not spectacular returns in 2019. The long-term data highlights that stocks have easily outperformed bonds, T-Bills, CDs and inflation, but stocks can be unpredictable over a shorter period and most likely will hit small bumps and sometimes major potholes on the road. Our job is to take every precaution to minimize the effects of market volatility on your portfolio and keep you on track towards your goals.
Dumont & Blake Investment Advisors, LLC
March 31, 2019