Plum Street Advisors
Q1 2019 Market Commentary – April 10, 2019
Early data suggests that the economy slowed markedly in the first quarter of 2019, and investors are asking whether we’ve hit a speed bump or a wall.
Moody’s Analytics expects GDP growth to only notch between 1-2% in the first quarter, and Factset is projecting a decline in year-over-year corporate earnings by -3.9% in the first quarter. Still, most prognosticators suggest it’s most likely to be just a speed bump, with factors like the partial government shutdown to blame for a slowdown. For the year as a whole, Moody’s is still predicting more solid 2-3% growth in GDP, and analysts are indicating a pick-up in corporate earnings as the year goes on.
Despite the first quarter slowdown, the US markets are looking ahead, and they started the year by bouncing back strongly. As interest rates declined early in 2019, the stock market gained confidence. After all, the long post-2008 rally has been consistently fueled by lower borrowing rates for companies and consumers. The Fed supported this rally when it suggested that it would halt interest rate increases for the rest of 2019. The S&P 500 index jumped and as of this writing is almost back to the highs reached last September.
2019 could well shape up to be the biggest year for IPOs on record, breaking through the levels of capital raised by IPOs in 1999 and 2000. Lyft went public just before the end of the first quarter, valued at $26.5 billion. Uber, Pinterest, Slack Technologies, and Postmates have registered for IPOs, and more could soon follow. Airbnb, WeWork, and Robinhood are other large firms reportedly mulling IPOs this year or next.
Questions remain, however, about the strength of the global economy. Europe is struggling, with its manufacturing output shrinking. Trade between the US and China has fallen sharply after the two countries raised tariffs, and companies have held off on investment as they wait to see what emerges from the negotiations. A deal which provides some face-saving for both sides and brings down the tariffs should be helpful to the market. Meanwhile, the UK is fumbling the ball on Brexit and it has become less and less clear what will emerge, if anything. If the UK crashes out of the European Union with no deal at all, the disruption could be severe not just in the UK, but across Europe.
The U.S. stock market rebounded strongly this quarter. The broad market Russell 3000’s total return was +14.0% for the first three months of 2019 (after a decline of -14.3% in the fourth quarter of 2018). Small cap stocks were in line with a +14.6% increase in total return for the quarter.
International stocks were ahead less strongly. International developed market stocks rose 10.6% as measured by the MSCI EAFE index, and emerging markets stocks gained 9.8% as measured by the MSCI EM index (both total return in local currency, net dividends).
As we predicted last quarter, the rally in interest rates was relatively short-lived and is over for now. The Fed’s dot plot suggests that the majority of Fed members do not see rates rising this year. The market is even starting to price in the probability of near-term rate decreases.
The long-term 10-year government bond rate started to fall at the end of 2018, and the trend continued in the first quarter of 2019, as the 10-year rate declined from 2.7% to 2.4%.
For the fourth quarter, the Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) rose by 2.9%, as bond prices move in the opposite direction of yields. The strong increase in both stocks and bonds for the quarter was unusual, and bears watching as the year continues.
Commodities as measured by the S&P GSCI index were up 15%, as the price of energy rebounded from recent lows. Oil, as measured by the U.S. Crude futures price, rose 32% in the first quarter. Gold, the commodity generally held in Plum Street Advisors’ portfolios, rose 1.3%, extending its increase of 7.7% in the fourth quarter.
After strengthening in 2018, the value of the US Dollar was little changed in the first quarter of 2019. The WSJ Dollar Index, which is a measure of the US Dollar versus 16 foreign currencies, started the year by falling in January, but regained all of its early losses as the quarter went on.
Growth in the US is expected to speed up after a slow start to the year. It’s a fairly good bet that the current economic expansion will become the longest (albeit not the steepest) in US history this year, exceeding 10 years of continuous growth. But this is not the end of the phenomenon of economic cycles, and there are signs that we’ll be nearing the end of this expansion soon – not likely in 2019, but increasingly likely the year or two thereafter.
It may feel scary to stay invested in the market this late in the economic cycle, but that’s been a concern for several years now, while the market has continued to test new highs. Although it would be prudent to anticipate lower investor returns in the long term (i.e. lower over the next 10 years than we’ve seen in the prior 10 years), it’s simply not possible to make short term calls on when to get in and when to get out of the market, however tempting that might be. After all, who would have predicted a 14% increase in the market this quarter, after sentiment was so negative at the end of last year?