1Q19 Market Overview
Optimism returned to this long-lasting bull market after Federal Reserve Chairman Jerome Powell reversed course and announced in January that the case for raising interest rates has weakened. He also vowed to take a “patient” approach to future hikes. This news along with more favorable U.S. – China trade negotiations sparked a global rally in equities.
Our diversified investment approach lessened the pain in the fourth quarter of 2018 and helped our clients to stay the course to quickly recoup year-end losses in the new year. Along with this rebound, we took the opportunity to replenish client cash flow needs and start the dialogue about pre-funding future charitable commitments.
Moving forward, volatility could return swiftly if a favorable U.S. – China trade deal is not completed since it appears to be priced into market valuations. Other headwinds will focus on a potential disorderly Brexit and additional unknowns will surface and add instability in the new year.
Regardless of the market direction, our rebalancing process will take advantage of the market movements to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level. Given the more attractive international market valuations and stronger U.S. dollar, our trade process will favor selling elevated U.S. asset classes in support of value-oriented investments that have historically excelled in the late innings of a global economic expansion.
U.S. Equity Markets
Following the year-end sell-off, U.S. equity markets posted a healthy rebound with the Russell 3000 gaining 14.0% during the quarter. The Federal Reserve’s pivot from a tighter monetary policy to neutral was just what the markets needed to move the noise away from recession fears. A more patient Fed coupled with progress in the U.S. – China trade discussions helped alleviate concerns and raise expectations that a favorable deal would soon be reached. From an economic standpoint, the U.S. Labor Department reported that employers added 196,000 jobs in March and average hourly earnings rose 3.2% over the past year. Full-employment, low inflation and a resumed uptrend in the leading economic indicators seem to support the Organization for Economic Co-Operation and Development’s 2.6% 2019 U.S. GDP forecast. Assuming the trade talks and political risks don’t derail overall growth substantially, the markets should continue to march in the direction of actual earnings and slowing forecasts.
International Equity Markets
International developed equity markets rebounded from the year-end sell-off with a 10.0% quarter gain for the MSCI EAFE. Like the Fed, the European Central Bank helped spark a rally by pushing out the first post-crisis interest rate hike until the end of the year. They also lowered their growth and inflation forecasts and announced a new round of European bank loans to boost spending and stimulate the economy since growth in the first quarter was only 0.2%. In Japan, a downturn in local economic indicators and non-existent inflation put pressure on equity markets and led to modest underperformance compared to the overall developed markets. The U.S. decision to suspend tariff hikes on $200 billion of Chinese goods coupled with on-going Chinese government support for their economy led to strong performance in China. This positive performance helped the MSCI emerging markets gain 9.9% during the quarter. As the markets continue to work through the trade talks, both developed and undeveloped international markets look even more attractive from a valuation perspective compared to U.S. markets.
Fixed Income Markets
Safety-minded investors experienced positive results as the closely watched Barclays Aggregate rose 2.9% during the quarter. After the Fed turned more dovish during the quarter to counter the softer economic global landscape, they pledged to take a “patient” approach to tightening monetary policy. Factoring in this new posture, the 10-year Treasury retreated from 2.69% on December 31 to 2.41% on March 31. As the U.S. economy weakened, the Fed felt it was necessary to back off on future interest rates increases which eased fears. Given the quick yield decrease, longer maturities benefited most. The Barclays US Government Long posted a 4.6% quarter gain, Intermediate 1.6% gain and Short 1.0% gain. In the international fixed-income arena, the JPM Non-US Unhedged gained 1.6%. The Barclays Municipal rose an impressive 2.9% since muni supply was down and demand increased as investors continued to fully absorb the positive tax advantage of this asset class.