If you travel through the village of Mantua in northeast Ohio, don’t drive with a dog in your lap. Determined to stop distracted driving, the police are aggressively issuing tickets to curb behaviors such as driving with an animal sitting in your lap or texting. All around the world, new laws are being written to address distracted driving. It is also important to not let various happenings distract us from accomplishing important plans of life. That includes plans about your finances – financial planning and investing for the future. We all know from experience that life events can get in the way of advancing forward with best laid plans for the future. Nevertheless, keeping plans and goals in our foresight provides better chance to achieving them.
With just four trading days remaining for May, the “rear-view mirror-ists” will be quick to say investors should have expected the noticeable pullback coming (nevermind that the month of May was firmly positive in each of the last 5 years). The S&P500 is off -3.9% with most attributing the decline to renewed tension between the US and China over trade-related policy and the fact is that until recently, most investors anticipated a trade agreement was not just close, but a virtual certainty in early 2019. Combined with a US Fed that now seems firmly on hold from any additional interest rate hikes this year, the stock market enjoyed support. While the Fed still appears content with its patient posture (very important), a truce between the US and China on trade is no longer in clear sight. Interesting is that smaller-size companies which are often believed to be more insulated from the dynamics over global trade and should in theory experience less influence from tension are actually faring noticeable worse in this latest war of words. But more telling perhaps is that international equities and those domiciled in Asia especially are really getting crunched compared to US domiciled companies.
Following one of the best four-month stretches for equity markets in recent memory, the month of May is proving more challenging with the S&P500 experiencing its worst week of the year. Despite a better than expected quarter of economic growth during the 1Q and earnings that are not as soft as feared, optimistic sentiment of investors that propelled the markets to swift recovery is now deteriorating due to escalating tension between the US and China in its ongoing trade negotiation. The US view is that China backed away/recanted from prior commitments and broke the deal. As a result, the S&P500 suffered a setback of -2.1% last week even despite a late-day rise on Friday (perhaps a show of optimism that drama between the US/China might progress over the weekend). That trade-related uncertainty and market pressure looks set to continue into a new week on headlines that discussions over the weekend made little progress and actually seem to be moving further apart. Abroad, international equities and emerging markets in particular are being punished more acutely as evidenced by the MSCI EM index forfeiting -4.5% last week.
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.
It should be news to no one at this point that 2019 is off to a fantastic start – at least for investors who continued to “stand in the pocket” despite getting repeatedly knocked down during 4Q’18. As many market participants believed at the time, the reaction by the financial markets to perceived slowing of economic growth that was anticipated (and is playing out) during the 1Q was overdone. But in fairness to investors, perceived Government missteps (or perhaps more fairly described as inflexibility) both on monetary policy evolution (Fed tightening) and Trade (US-China) made it hard to maintain confidence in officials being able to do the right thing for the US economy in the face of persistent international economic weakness and uncertainty. Since that time, sentiment on both items has turned more favorable, leading to a swift recovery for domestic equities. Investors also find themselves questioning whether they have been too pessimistic over international economic and financial market prospects. Significant economic, regulatory, and political uncertainties hampered international investing success for much of this 10-year cycle, but lesser acknowledged is how much has been done to improve monetary policy transmission in support of the banking system and economic growth. This sets international markets for potential out-performance especially when considering valuations overseas are more attractive than domestic on a number of measures and the currencies are cheap relative to USD.
The 1st quarter was one of the strongest starts to a new year in the last two decades. It followed an equally unsettling period over the final 3 months of 2018 which significantly damaged investor sentiment, making the swift rebound another textbook example revealing just how challenging would be market timing. This quarter’s newsletter contains four brief articles. “Reflections on a Bull Market” and “Age is Just a Number” provide perspective on the progress of the current bull market and economic cycle, respectively, which are both long by historical standards but need not die due to age alone. “No Beauty Contest” shares why the treasury yield curve is an indicator investors are monitoring closely, especially now, while “Style Differences Exist” provides color about how we are positioning client accounts with consideration for managing portfolio risk.
The full printer-friendly version of our newsletter, including data tables for selected mutual fund and ETF performance as well as portfolio benchmarking, can be downloaded here: NVEST NSIGHTS 1Q.
Another tax filing season is quickly drawing to a close, and for many people that means the anticipation of a sizable refund headed their way. The IRS indicates that about 80% of taxpayers receive a refund, with the average being around $3,000. That’s a nice chunk of cash! What’s not to be excited about?
The 1st Quarter concluded with each month firmly in positive territory and a cumulative advance for the S&P500 of +13.6% – a sharp reversal from the experience suffered closing out 2018. Interesting fact: since 1950 there are only 19 examples of the S&P500 starting a year with positive performance in January, February, and March and returns over the following 9 months historically came in above average (though mid-year corrections were just as likely). The early year improvement has been most attributed to a decidedly more deal-seeking tone on the issue of US-China trade and a US Federal Reserve that now appears firmly on break from any additional interest rate hikes or incrementally tighter monetary policies. While those developments are welcomed, the forward-looking message to be gleaned is far less clear. In recent weeks for instance, smaller-size companies along with transportation and industrial sectors have been laggards. Too, it is widely expected that the US economy has entered a decidedly more sluggish period of economic growth and safe-haven bond yields have drifted lower; a condition usually accompanied by a risk-off mood and caution.
It was just the 2nd down-week of the year, but below the surface many individual names have been consolidating since mid-February. The S&P500 gave back -2.1%, but the more cyclical and strongest YTD performing areas are pulling back more sharply with transportation stocks down -3.3% and small-caps off -4.3% (Russell 2000). This weakness should embolden the somewhat consensus call that that the rally since the Christmas eve low was too strong for such a short-period of time and without any retesting.
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.