After a very difficult ending to 2018, the markets made a large recovery to start 2019. In fact, the 13.1% return for the S&P 500 Index was the best quarterly return since the third quarter of 2009, and the best first quarter since 1998. The big momentum change actually started at the end of 2018 with a combination of optimism that the US and China would reach an agreement to avoid a trade war along with comments from the Federal Reserve that future interest rate increases may be less aggressive than anticipated. Since a trade agreement between the US and China is still pending, hindsight indicates that comments from the Fed had the biggest market impact. In fact, the general expectation in early December 2018 was that the Fed would increase rates 2-3 more times in 2019 after moving rates up to the 2.25% to 2.50% range. It takes some reading between the lines, but the big change is reflected in statements from Fed Chair Jerome Powell on December 19th that rates were at “the lower level of neutral” to comments on January 4th that slowing global growth would allow the Fed to “be patient as we watch how the economy evolves”. Economists are paid a lot of money to differentiate between those quotes and make substantive forecasts, but the real world implication is that the Fed is no longer expected to raise interest rates in 2019 (there are even some who predict a Fed rate decrease) meaning more stability for investors which provided a launching pad for a strong start to the year.
The changing market momentum hasn’t made an impact on our long-term investment approach, but it has created a shift in our daily portfolio management focus. We were capturing tax loss harvesting opportunities at the end of 2018 and rebalancing client portfolios from Bonds into Stocks to maintain target allocations. Now we are making sure that Stock exposure doesn’t go above our risk tolerance. Although there isn’t a clear consensus on what the markets will bring for the remainder of the year, most investors expect that a combination of geopolitical concerns could create significant market volatility while slowing growth rates may limit additional upside. Key geopolitical issues continue to center around the potential US-China trade war, Brexit, and the Middle East. Growth rates have slowed in the US, China and Europe to start the year and projections are not optimistic for the next quarter or two. At this point we don’t see anything pointing to a recession in the near term and we will continue to focus on maintaining diversified client portfolios with cash flow planning as an important consideration. Hopefully we can continue to find a “goldilocks” scenario where markets don’t get too hot or too cold.
For more information on investments and the markets this quarter you can look at our Quarterly Market Review.
