After a tumultuous end to 2018, the rebound in markets has led to the strongest start in decades. Fears of an economic slowdown, escalating trade wars and monetary tightening gave way to optimism over possible continued expansion and low unemployment, along with recognition that the Federal Reserve was pretty much done with its tightening cycle.
The Broad U.S. stock market rallied in excess of 14 percent in the first quarter. International Developed and Emerging Markets also performed well, up 10.4 and 9.9 percent respectively. The bond market contributed positively to results with the U.S. Bond market index up 2.9 percent for the period. A globally diversified portfolio of 50/50 equities and fixed income would have returned 6.37 percent for the period.
INTERNATIONAL – In U.S. dollar terms, Hong Kong and Canada recorded the highest country performance in developed markets, both up in excess 15 percent. In emerging markets, Columbia and China recorded the highest country performance, up 25 and 17 percent respectively. Turkey and Qatar were the worst performers, both down more than 2 percent.
FIXED INCOME – Interest rates decreased in the U.S. Treasury fixed income markets helping to propel positive returns during the first quarter. The Treasury 10-Year yield collapsed from 3.2 percent in October to 2.4 percent in March. Short-term corporate bonds gained 1.83 percent; intermediate-term corporate bonds 3.82 percent; and municipal bonds 2.78 percent during the quarter.
ALTERNATIVE INVESTMENTS – The Federal Reserve’s decision to hold off on further rate increases propelled the Real Estate Investment Trust (REIT) to be the top performing asset class for the quarter with U.S. REIT Index up over 15.7 percent. After several periods of negative returns, the Bloomberg Commodity Index returned 6.32 percent for the first quarter of 2019. Energy-related commodities led all areas with Crude oil up 29.4 percent; grains were the worst performer with wheat down 13.1 percent.
CONCLUSION – The global business cycle has been on a weakening trend for over a year with the “hill getting steeper” each quarter. European politics and trade policy uncertainty with China are all still in flux. After averaging earnings growth over 20 percent for the first three quarters of 2018, the S&P Index of companies has seen earnings growth slow dramatically, dropping to 12.5 percent growth in the fourth quarter and then falling even further in the first quarter of 2019, all way down to a mere 2 percent growth rate. That downward trend in earnings growth is expected to continue on for the rest of the year. Coinciding with the downward trend in earnings growth, markets appear to be at least fully valued if not overvalued. According to Ned Davis research, the price earnings ratio of S&P500 Index over the last 50 years has been slightly over 17 times earnings. Currently the Index sits at a multiple of 22 times earnings. Slowing earnings growth and rich valuation do not set the table for high equity returns in the near term.
Based on all of the factors noted above, the window of opportunity for continued rise in equity markets would appear limited. Thus, we are recommending a more conservative positioning of portfolios.
As we outlined in last quarter’s Market Review, volatility is part and parcel of investing. Similar to volatility, investment fads are nothing new to investing. Bitcoin comes to mind as a recent example. Investors are often tempted to seek out the latest and greatest investment opportunities without quantifying the risk or appropriateness to their overall investment portfolio. The attached article from Dimensional Funds “Déjà Vu All Over Again” – coupled with the recent headlines of UBS offering an “Iron Condor” investment opportunity to enhance yields that ultimately backfired – reminds us that during times of uncertainly such as we are in now, there are no short cuts and no substitute for staying disciplined and diversified to carry you through.
As Nobel laureate Eugene Fama once said, “There is one robust new idea in Finance that has investment implications every ten or fifteen years, but there is a marketing idea every week.” We greatly appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss.
Please follow this link to read the complete Quarterly Market Review Q1 2019.