The first quarter of 2019 has been well-received by investors, with market indexes up by double digits. Although not fully reversing the damage incurred in 2018, markets are not far from their all-time-highs. We like to remind investors that the year is still young, and the last thing one should do is get too comfortable. By definition, a market must have buyers and sellers, so we are inundated with opposing views on its expected direction. So, should we review the “good news” or the “bad news” first? Given the fact that last year’s market was so disheartening, let’s kick this post off with the positive.
The Good News
- Investors are no longer “fighting the Fed.” In 2018, Fed Chairman, Jay Powell, became “public enemy number one,” by signaling his intention to hike interest rates three to four more times. That is no longer the case, as in his March press conference he effectively took any chance of a rate hike in 2019 off the table. With rates more predictable and at their current low levels, this is advantageous to consumers and businesses, which will help sustain the economic expansion.
- Bond yields remain low and are still relatively unattractive when compared to the stock market’s earnings growth and dividend yields.
- Investors have a more stable oil price that has been propped up by OPEC supply cuts.
- Technology stocks (even the semi-conductors) have regained strength and leadership in the market.
- The S&P500 has finally broken through the key resistance level of 2800.
- IPO Market is red hot (Levis, Uber, Lyft, Peloton etc.) with pent-up demand after the IPO market was shut down for 4 months.
- Overall declining recession and inflation fears.
- China is back to full stimulus mode, which is helping to prop up its expected growth. This should provide stability to the emerging markets as a whole.
In combination, these factors can help to continue this market recovery. But, surely there’s always something to be worried about.
The Bad News
- The upcoming Q1 Earnings season could pose to be quite difficult for investors. Corporations had a fantastic Q1 in 2018, which makes the Year-Over-Year comparison very difficult to beat. Markets in the past have thrived when stocks are beating earnings expectations and improving on their year-over-year numbers. With the bar set so high in Q1-2018, we may need to wait until Q2-2019 before we get much easier comparables.
- We are in a period of a global synchronized slow down. Although some would argue that economic growth is at a sustainable and positive number, the pace of growth is slowing. Hence, we are seeing many corporations provide future earnings guidance that is lower than expected (example: Fedex). During an earnings season, investors want companies to raise their earnings guidance. This also might be something that disappoints investors. Analysts have lowered the S&P500 Earnings expectations to roughly 5%, however, it might take another quarter for these lowered numbers to be digested by the market
- As the saying goes, “Sell in May, Go Away.” Every Spring, investors have to wonder whether we will face this seasonally negative period. The belief is that as warmer weather sets in, fewer market participants are trading (due to vacations), and the resulting lower investment volumes may lead to riskier markets. There is an ongoing debate as to whether “Sell in May” would actually benefit investors, as it has not worked for investors since 2013. Regardless, after such a strong start to 2019, markets may be more welcome to the idea of trimming some of the gains in the spring.
- No one really knows how the Trade War will unfold. President Trump is caught juggling two opposing needs. On one hand, he would like to make progress on the trade war prior to his upcoming reelection campaign. On the other hand, he has little trust in President Xi to fulfill any of the agreed concessions, and therefore needs to maintain a somewhat hostile tone. Markets have shown to be very reactive and volatile to any tweets or announcements that make the goal of a trade agreement seems further out of reach.
- One of the more reliable indicators of an upcoming recession is an “inverted yield curve.” An inverted yield curve is when short-term interest rates are higher than their longer-term counterparts. Although the majority of the evidence suggests that US recession risks are low, many investors are keenly watching the yield curve, and may become more nervous if it gets closer to inversion.
In all, it’s important to continue to monitor and rebalance your portfolios. Even those investors who feel confident in the market’s long-term prospects should take a moment to review whether any positions or asset classes have grown beyond their target weightings. The year is long, and we believe that rebalancing the portfolio is a sound strategy.