1Q Resoundingly Strong; but Conflicting Signals Emerging – Week Ended 3/29/19

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.

On the topic of fundamental economic data, several key readings are confirming what has become a pattern of sluggish 1Q growth.  Housing starts declined -8.7% in February, building permits were also lower.  Also, despite mortgage rates that are significantly more attractive than throughout most of 2018 (moved back down toward 4% on falling bond yields) home prices are yet to firm.  The economy appears to just be muddling along at this stage.  Perhaps most troubling is the weakness being observed internationally with Europe and China seeing their activity slowing.  Brexit uncertainty, persistent, does not help.  On the more positive side however, the US money supply is beginning to hook higher (welcome following contraction experienced in 4Q); weekly jobless claims are staying low; and homebuilder surveys are evidencing some optimism.  Consumer confidence is also higher; we believe that business confidence however will remain relatively uncertain as long as US-China trade deal is yet to be finalized and there is a risk that a deal takes longer than markets are patient.

With US equities significantly recovered, the market seems to be accepting that a soft landing for the US economy is possible/probable (no near-term recession).  But with that also comes the argument that financial assets appear less attractive and more vulnerable to unexpected events.  Further, while equities are higher, the risk-off message from bond yields creates unease; the US yield curve is now inverted between 1 and 10 years (reason for sharp selloff on 3/22); and the 2/10 spread (not yet inverted, but best predictive record) is tightest since 2007.  Some point to the unprecedented level of Fed influence creating distortion and reason to give the indicator less credibility this cycle, but the fact remains that technical traders and sentiment are watching closely and that inversion in any part of the maturity curve suggests that a mistake was made (ie the Fed perhaps hiked rates one-too-many times; or was not a second too early in its decision to pause).

All told, we believe that the market is not yet flashing signs of a bull market top and that a soft economic landing is probable.  But also believe investors must remain open to the idea that the remainder of the year is unlikely to be without a meaningful setback.  Check back on these pages as we will be posting our quarterly newsletter.  As always, we welcome the opportunity to be a resource!

Posted in Blog Post.