First Quarter 2019: Spring Forward – Investments and the Weather Are Both Warming Up

Written by John Cox, CFA, CAIA on April 3, 2019

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As we enter into springtime, we have passed the onset of Daylight Saving Time in which we set our clocks ahead one hour — or “spring forward” as people like to say. While initially this event may be viewed negatively because an hour was taken away from us, in reality, it is positive in that we are ushering in a beautiful time of year when the flowers are blooming, and the weather is mild.

Winter tends to be dark and gloomy, which may be a good description of the global stock market during the fourth quarter of 2018. December was particularly bad, with the markets experiencing a significant downturn until late in the month. A turning point was reached on December 26th, when the Dow had its best one-day gain in terms of points (but not percentage gain) and then finished the year with several strong days. What changed? Was it the Federal Reserve announcing that it was likely at the end of its rate-hiking cycle? Was it positive news on the US-China trade front? Was it simply seller fatigue after one of the worst Decembers in modern history? It could have been one of these, but, then again, it could have been something entirely different that turned the sentiment from pessimism to optimism. The message here is that successful investing includes getting through the dreary winter months to experience the refreshing spring months. Just as you cannot fast forward past winter, investors cannot avoid volatility and periodic market downturns.

2019 is off to a great start, even though economic news has been somewhat mixed. The economic growth cycle that began in 2009 is about to reach the point at which it would be considered the longest in the history of our country. While this is good news, many people believe that we are getting closer to a recession. Job growth continues to be strong with over 100 straight months of positive job creation; however, economists realize that we are near the level at which unemployment cannot decline much more. On the other hand, corporations continue to have strong balance sheets and produce decent earnings, although not as good as 2018. Inflation remains in check, and market valuations are not out of line.

Bear markets (declines of 20% or more over an extended period) are typically caused by one of four conditions: (1) economic recession, (2) spike in energy prices, (3) a Federal Reserve that is too aggressive in raising interest rates or (4) extreme valuations. In our view, none of these conditions is currently present, but markets can still be unpredictable. We have had a strong first quarter, but we need to remember that it was only a few months ago when things seemed bleak. In other words, it is never as good as it seems, and it is never as bad as it seems.

In terms of market performance, the first quarter results were very impressive. U.S. large company stocks (S&P 500) rose by 13.6%, while the Russell Mid-Cap and Russell Small Cap indices also experienced strong growth, advancing by 16.5% and 14.6%, respectively. International stocks in the developed markets of Europe and Japan, as measured by the MSCI EAFE index, increased by 10.0%, while the MSCI Emerging Markets benchmark appreciated by 9.9%. Declining intermediate and longer-term interest rates caused the bond market to produce a positive return of 2.9%, based on the Bloomberg Barclay’s Aggregate index.

As we turn the page to the second quarter, markets will be focused on a number of factors, including a slowing, but still growing, global economy and concerns about China. The timing of the next recession and bear market is impossible to predict, so investors need to continue to focus on their long-term goals and keep in mind that these goals can only be accomplished by having a long-term market perspective. Even though there will be rainy days during this spring season, we know that there will also be beautiful days with ideal temperatures. Investors can benefit from understanding the parallels between the weather and the investment markets.

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