Four months of 2019 are in the history books and investors should be delighted, as January, February, March, and April were each positive performance experiences. The cumulative result is a total return exceeding +18% for the S&P500 index. That’s well ahead of the average January to April return of +3.7% over the past 25 years, and is an attractive return for most full years. A “4-peat” is rare, but not unprecedented with 2019 notching the 16th observation since 1950. The other 15 historical occurrences went on to provide an additional +10% average return for the final 8 months of the year, though there was usually a pullback (-8% on average) along the way. The S&P500 index added +4% during April boosting the strong 1Q returns. Client portfolios continued their advance, as both stocks and bonds provided positive returns.
Two months and so far, a very Happy New Year!!! February added +3.2% to a very strong January, making this a great start to 2019 for investors with the stock market jumping a cumulative +11.5%. Wow!! We appreciate the Fed again communicating economic data dependency rather than an autopilot path of raising interest rates, plus tariff talk between the US and China is showing promise of moving toward a resolution. These items are propelling markets higher.
Thank the Fed for the surge! The S&P500 posted its best January performance in 30 years (since 1989). Following a nasty 4th quarter and very difficult December which ruined the year, the Fed offered numerous reassurances in January that it was not inclined to make a policy error. Fed Chairman Powell shared that policy action would be more data dependent; rate increases and tightening monetary policy would not be on “auto pilot” in 2019; this was a stark difference from the tone conveyed in December. We believe January market action was mostly a reaction to a pause in rate hikes. It provided tremendous “fuel” for the strong rebound of +8.0% in the last month. Hey, that’s a bit stronger than the January 2018 performance start of +5.6%. Yet, there is one notable difference…last January, 51% of investors expected higher stock prices which did not materialize for the year; today, only 31% expect higher prices. Domestic and foreign stocks rebounded, and client portfolios benefited from the market boost in January (note the difference a month makes).
All the historical hype surrounding favorable mid-term election year investment returns is yet to materialize as we conclude 2018. Since 1950, every mid-term election (17 of them) resulted in strong end-of-year stock performance because the unknown of political change concluded. A different stock market stat, again since 1950, reflects that 75% of December returns are positive; that is the highest single month probability of upward performance for any of the 12 months (next highest is April at 71%, and November with 68% of the time being positive – see chart below). This year, the 4Q experience to-date seems stark opposite.
Shake or bake; not! Shake and/or Break is a fitting title for the frightful market action in October. Markets may “shake” because of tariffs. But, the Fed can cause the market “break.”
Much of the blame for October is aimed at President Trump and/or Federal Reserve Chairman Powell. Investors are concerned that the Fed remains inclined to raise interest rates further – 1 more hike in December, and presently communicates 3 additional times in 2019. There are even forecasts of one more rate increase planned in 2020. Investors are also concerned about tariffs because they are like a tax to American citizens. Both issues are viewed as punitive to economic growth over the next 12 months. Some wonder if the recent economic strength is “as good as it gets.” That suggests that economic and business growth will be shifting into slow expansion again (even though this expansion will become the longest running in US history next year). The economy is probably able to handle slow rising interest rates, to a point. But the stock market will show stress earlier, as witnessed by action in October. In essence, the market tone was altered due to these two concerns. Again, markets may “shake” because of tariffs; but markets could “break” because of the Fed.
How old is someone born in a leap year, on February 29th? I guess it matters how and when you start counting. The current Bull Market started March 9, 2009. By most any measure, this Bull Market is now the longest running at 3,463 days. It achieved its “longest status” on August 21. Amazing though, this Bull Market is often not considered one. Not many believe in it and some stubborn skeptics still refer to it as a strong rally. Perhaps that is because many investors were under or un-invested during much of these years because of the two Bear Market drawdowns of almost 50% in 2000 and 2008. Many were afraid to re-invest following severe portfolio value loss and market volatility. Trying to time the market by following emotion is most always a very dangerous strategy and often results in a bad investment experience.
“Extremist,” the word and its meaning, is not usually considered in a positive light. The term usually carries a negative connotation when describing a person (or group); one which attempts to bring about change using extreme methods. An “extremist” could be one who favors or resorts to immoderate, uncompromising, or fanatical methods of behavior to the point of being radical. Synonyms for “extremist” include fanatic, radical, zealot, agitator, revolutionary, die-hard, or ultraist. Yet some of the most historically significant moments and events are defined by individuals and organizations that were termed “extremist” – countless names/groups come to mind that could be categorized this way.
“The biggest business in America is not autos, steel, television”, or apples. “It is the manufacture, refinement, and distribution of ‘anxiety’.” Such was penned by media legend Eric Sevareid (who was an American author and CBS radio and television news journalist from 1939 to 1977) when the “news” consisted of a morning newspaper and a half-hour of nightly national news. One would probably consider this a recently offered thought rather than from 1964. What might anyone say today about our constant barrage of “news”? News today seems more commentary and opinion in a wrapper called “news.” A “geopolitical fog” of “news” is creating a directionless market; issues consist of – tariffs/trade; rise in oil prices boosting inflation expectations; the Fed raising interest rates too fast and/or too much; mid-term election year; Italy/Spain politics; not to mention North Korea or Iran; and etc.
Market participants appear to believe inflation is back and will be sticking around. That’s affecting how investors perceive the outlook and direction for the bond and stock market. As such, this may be the first time since 1990 that diversification benefits achieved by mixing bonds and stocks together are changing. Since late January, both stocks and bonds are caught in the crosscurrents of increased negative activity in Washington DC, namely tariffs and possible trade wars. Add tax reform and fiscal spending which are boosting the prospects of rising federal deficits. The markets are also aware 2018 is a mid-term election year, wherein the composition of Congress could change. On the opposite side, still low but slowly normalizing interest rates, plus low inflation, plus a lot of money (liquidity) in the financial system, plus high confidence by consumers and businesses, all combine to provide a support backdrop for the economy and financial markets.
Early in February the S&P500 and other indexes fell into correction territory. Recall, a correction in the financial markets is a 10% or greater decline from recent highs, which occurred on January 26th. Pullbacks, even in strong uptrends, are historically considered normal. But this was the first drawdown of -5% or more in 404 trading days running since February 11, 2016. Is the correction overdone? Perhaps, but it was probably overdue. Market agitation was brought on by 3 occurrences – feelings that valuation was stretched; a big jump in volatility; and uncertainty about inflation (more below). Also, many investors remain concerned that valuations are stretched, and they became shocked by increased volatility following 23 months of calm and steadily rising stock prices.