First Quarter 2019 Market Update
Not a Bad Place to Be
I want to review for you what happened in the economy and financial markets in the first quarter of 2019; and discuss what to look forward to in upcoming quarters.
It was a great quarter, with markets up around the world. Here in the U.S., the major indices were up between 11 percent and 17 percent, with the NASDAQ leading and with the Dow trailing due to turbulence at Boeing. Abroad, both developed and emerging markets were up just under 10 percent. Even fixed income did well, as interest rates dropped on the Fed’s shift to a more relaxed stance on monetary policy, signaling few if any more rate increases this year. From an investing perspective, this was a really good quarter and the best we have seen in a decade.
But this positive picture was kind of strange. Why? From an economic standpoint, it wasn’t ugly, but it certainly wasn’t good. We saw slowdowns in job growth, in consumer and business confidence, and in spending growth. Corporate earnings expectations were revised down at the fastest rate in years. Political headwinds continued to build, both here and internationally. It was a tough quarter for the fundamentals.
So, what happened?
In a word: valuations. Based on expected earnings over the coming year, in the last quarter of 2018, stock valuations dropped down to the lowest level we have seen since 2013. As such, stocks became (by recent standards) cheap. In that sense, the rebound this past quarter was simply the market going from cheap to fairly priced.
There was also a tailwind from interest rates. As rates drop, stocks are seen as being worth more. Further, the bad news that drove down stock values—trade wars, the government shutdown, fear of the Fed, Brexit, and others—all pulled back during the quarter. Combine these ingredients, and we had a recipe for a bounce back that has taken us back close to all-time highs.
This look back also gives us a lens for what we need to watch going into the next quarter. Is the economic data recovering? The most recent strong jobs report suggests it is, along with stronger confidence and spending figures. Moreover, the past several years, first quarters have been weak only to rebound strongly for the second quarter. That could well be the case again. Will interest rates rise again? Probably not, with the new Fed stance. Will we see more worrying political news? Quite possibly, but Brexit seems to be turning from tragedy into farce, and Washington appears to be closing in on a trade deal.
The two unfinished pieces of news from the first quarter are the real risks. First, as of the start of March, the U.S. government ran out of money again as the debt ceiling came back into force. This is a pending issue that could take us back into a shutdown, or even somewhere worse. Second, stock valuations are now at fair levels, without the rubber band effect that helped pull them higher in the first quarter.
Not a bad place to be
Looking back at the first quarter, the mix of strong markets and weak economic data is not likely to fully reverse, but it may at least moderate. We can expect market growth may continue, but more slowly, and economic data to improve. Overall, it is not a bad place to be.
Mike Ovshak, CFP®
The information in this letter is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.
Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentured. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The MSCI EAFE Index (Eurpoe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices. Allindices are unmanaged and investor cannot invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses.
Parts of this commentary are authored by Mike Ovshak, President and Owner at FPS Financial, Inc., and by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.
© 2019 Commonwealth Financial Network®