Market Update for the Quarter Ending March 31, 2019

Strong March caps great start to the year

All three major U.S. equity markets were positive for March. The Nasdaq Composite led with a return of 2.70 percent. The S&P 500 and the Dow Jones Industrial Average (DJIA) had gains of 1.94 percent and 0.17 percent, respectively. For the quarter, the Nasdaq, S&P 500, and DJIA gained 16.81 percent, 13.65 percent, and 11.81 percent, respectively.

Market fundamentals worsened. The first-quarter earnings growth estimate for the S&P 500 fell from 2.9 percent to a loss of 3.9 percent. Analysts do expect positive earnings growth for the next three quarters, however.

From a technical perspective, all three major U.S. indices spent much of January and parts of February below their 200-day moving averages. But they ended the quarter above this important technical level.

For international markets, the MSCI EAFE Index gained 0.63 percent for March and 9.98 percent for the quarter. The MSCI Emerging Markets Index gained 0.86 percent for March and 9.97 percent for the quarter. Both indices finished the period above their trend lines.

In fixed income, the Bloomberg Barclays U.S. Aggregate Bond Index gained 1.92 percent for the month and 2.94 percent for the quarter as yields declined and prices rose. The 10-year U.S. Treasury yield started the quarter at 2.66 percent and finished at 2.41 percent.

High-yield bonds, as measured by the Bloomberg Barclays U.S. Corporate High Yield Index, gained 0.94 percent in March and 7.26 percent for the quarter.

Economic growth slows—but continues

Only 20,000 new jobs were added in February, a sign that job growth could be slowing. Employment growth accelerated at year-end before falling in 2019 (see Figure 1).

Figure 1. Employment Growth, 2012–2019

Consumer confidence reversed its recent bounce to trend lower. A strong jobs market is a major driver of consumer confidence. Weakness here may be a worrying signal.

Consumer spending growth also pulled back. January’s personal spending report showed growth of 0.1 percent, and retail sales in February fell 0.2 percent.

The Institute for Supply Management Manufacturing and Nonmanufacturing indices, which measure producer sentiment, rebounded following declines in December and January.

Business investment grew, with durable goods orders increasing 0.3 percent in January. Business confidence appears to have rebounded from the year-end turbulence. Business spending continued to grow.

Fed responds to slowdown

In response to weak data, the Federal Reserve (Fed) indicated there would be no further rate hikes and that it will end its balance sheet runoff. First quarters have been weak over the past several years, only to rebound. So, the next couple of months are important.

The risks are subsiding

We avoided another government shutdown. Further, lower mortgage rates made buying a house more affordable, leading to increases in new and existing home sales in February.

Abroad, the Brexit negotiations appear deadlocked, although the deadline for a no-deal Brexit has been extended. A slowdown in Chinese growth could also affect markets.

A new risk is the yield curve inversion. After the Fed announced a looser monetary policy, yields on long-term government debt went down. This move left longer-term interest rates lower than shorter-term ones. As a result, the yield curve inverted, which typically signals a higher risk of recession. But this risk is likely for 2020—not 2019.

Strong quarter starts year off right

U.S. markets showed resilience in the first quarter. Economic growth has slowed but continues. There’s room for confidence to move higher. Finally, earnings growth disappointed, but analysts’ estimates for the rest of 2019 are positive.

Conditions may improve as confidence and spending catch up to 2018 levels. Further, lowered interest rates are generally supportive of faster growth.

The takeaway is that volatility can happen quickly. The past six months highlight the importance of creating well-diversified portfolios that can withstand short-term volatility.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.