First Quarter, 2019

The US equity market got off to a fast start in 2019, as the S&P 500 Total Return index gained 13.7%1 during the quarter.  Corporate bonds also fared well during the first 3 months1 of the year, with the Bloomberg Barclays US Aggregate Total Return index gaining nearly 3%1.  Equities and fixed income had a positive catalyst in common, namely the seeming reversal of the hawkish stance the Federal Reserve had taken toward the end of 2018.

Recent developments have caused the Federal Reserve to rethink some of its policy statements during the first quarter. While Fed policy makers had previously implied that more rate hikes were imminent during 2019, now they expect to hold policy steady for the remainder of the year, with the possibility of only one hike during 2020.  Market participants, however, seem to believe that the next rate move may in fact be a rate cut.  Should this be the case, fixed income may benefit, given the inverse relationship between bond prices and interest rates.

The economic picture of late has been a bit of a mixed bag. While employment remains strong and more people appear to be encouraged enough to rejoin the labor force, retail sales have painted a surprisingly grim picture.  In fact, the reported number for retail sales for December 2018 (-1.8%)1 was so bad that many economists and market participants simply did not believe it.  The retail sales malaise appears to have continued in February.  These data points may lend some credence to the idea that the next move made by the Federal Reserve will in fact be a cut.

Part of the rise in equity values was simply a response to the oversold nature of the selloff that began early in the fourth quarter of 2018.  Corporate earnings came in better than expected, even after taking into consideration the lowered expectations of analysts.  In addition, equity valuations remain reasonable given low interest rates and low inflation, with the price earnings ratio of the S&P 500 coming in just below 19, with the 12-month forward P/E near 16.51.  While these valuations do not indicate a cheap market, they also do not imply a terribly expensive one.

A potential catalyst for the equity market at large would be the resolution one way or the other of the trade conflict with China.  A positive resolution could drive the market higher.  A negative outcome, however, would certainly damage the economic prospects of China, which could have a ripple effect throughout emerging and developing markets alike. 

Of course, the equity market trades with an eye toward the future, rather than the past.  According to data from FactSet, analysts have lowered their earnings estimates for the 2019 calendar year by almost 4% during the past 3 months.  This leaves analysts’ expectations for earnings growth at just north of 4% for the 2019 calendar year.  While this may be seen as a negative, it may provide a low enough bar that the companies that comprise the S&P 500 will be able to beat expectations and generally support the current market level.

1Factset Research Systems,2019

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.