By Rafael A. Villagran, Portfolio Manager
Markets started the year on a sprint, and that’s encouraging, particularly in light of how stocks finished 2018. But investing is a marathon and we always keep our focus on the longer-term. And, putting the first quarter rally into context, stocks just climbed back up to where they were last September/October prior to the fourth quarter pull-back. We see two primary drivers behind the recent bounce: (1) the Federal Reserve reversed its’ guidance regarding anticipated changes to interest rates from ‘likely hikes’ to a ‘data dependent maybe not,’ and (2) more recently the markets are responding to indications about a potential trade deal sooner rather than later. Both of these factors are highly important to the economy and markets, and both remain very fluid and deserve close watching.
Regarding economic trends, the U.S. economy has shown signs of slowing over recent months (e.g., retail sales and durable goods orders), although the jobs increase in March was encouraging. Economic conditions in Europe and Japan have also softened, and even more so than in the U.S., and Brexit (i.e., the U.K.’s planned exit from the European Union) remains a bit of a threat. It’s unclear the extent to which the global softening reflects the impediments to trade attributable from the U.S./China tariff exchange, but it’s widely expected that their removal would be positive. Even more positive for the global economy would be a ‘real’ trade deal that could encourage more trade, rather than simply a ‘face saving’ agreement.
Reflecting investors’ recent concerns about the economic outlook, the yield curve shifted towards a flattening and even briefly inverted. The yield curve is the relationship between market-driven interest rates for shorter-term maturities versus longer-term maturities. An inverted curve for a sustained period has historically been predictive of economic downturns, and as such this condition deserves watching. At present, however, we continue to believe that continued economic growth appears more likely than not through 2019.
In all, we embrace the very positive start for the year, which for the S&P 500 was the best first quarter since 1998. Such double digit starts have historically tended to bode very well for the year. We do caution clients, however, to contain their expectations for the remainder of 2019.