The global stock markets rebounded across the board in the first quarter of 2019. The improvements were a reflection that recessionary fears were overblown. On the global front, markets became more confident as China trade tensions abated. Domestically, the markets applauded the Fed’s decision to pause further rate increases for the near-term. With positive earnings growth, unemployment at near record levels, and a strong consumer, the domestic economy is proving to be resilient. In effect, all the negative indications in the fourth quarter 2018 have disappeared, and we have resumed the ongoing path of prosperity.
Asset Class Performance Over the Last Twelve Months:
CASH
- Throughout 2018, the Federal Reserve continued to raise rates. However, at the end of 2018, the Fed paused further rate increases.
- Yields on cash assets rose throughout 2018 and leveled off in the first quarter of 2019.
- A year ago, the 3-month T-Bill was yielding 1.77%. Since then, rates continued their rise throughout 2018 and ended the year at 2.45%. The yield was virtually unchanged, ending the quarter at 2.44%.
BONDS
- The Fed indicated that they would take a softer approach to rate increases at the end of 2018. As such, long-term rates have fallen, while short-term rates have held mostly steady.
- Over the last twelve months, the US Treasury Short Bond Index was up 2.2%, while the longer-term US Treasury 20+ Year Bond Index was up 6.2% and improved 4.7% in the first quarter of 2019.
- Foreign bonds (Bloomberg Barclays Global Agg ex-US, US Dollar Hedged) turned in a 5.2% return over the last year and 3.0% in the first quarter.
STOCK (see chart below):
- In late December 2018, the markets made a significant turnaround with the Fed backing off from raising rates and an improved outlook for global trade.
- The Dow Jones Industrial Average was up 10.0% for the last twelve months and was up 11.8% in the latest quarter. The more broadly-based S&P 500 Index was up 9.5% over the last year and was up 13.7% in the latest quarter.
- International equities (MSCI EAFE Index) were up 10.0% for the most recent quarter but turned in a loss of -3.7% for the last year. European equities (MSCI Europe) were down -3.1% over the last year. The Pacific Rim markets were negative with Japan (MSCI Japan) down -7.5%, while Asian stocks (MSCI Asia-Pacific ex Japan) posted a -3.2% return over the last year.
- Domestic utilities were the big winner of the last year with a 18.4% return (MSCI USA Utility Index) as investors moved towards more defensive positions.
- Technology stocks rebounded from last year with an 18.9% (MSCI – ACWI Information Technology) return during the first quarter. Technology did reasonably well over the last twelve months with an 8.9% return.
- Energy stocks turned in a modest 3.7% return (MSCI ACWI Energy Index) for the last year as oil prices declined through the fourth quarter of 2018. Energy stocks rebounded in the first quarter with a 14.3% return.
Source: MSCI
12-24 Month Outlook:
- U.S. GDP (Gross Domestic Product) slowed to 2.2% in the fourth quarter of 2018. Fed projections indicate the U.S. economy will be in the low 2.0% range over the next several years.
- In the latest release of data, U.S. Leading Economic Indicators increased 0.4% in March, following a 0.1% increase in February. The leading indicators are an important guide for future economic growth. The coincident indicators increased 0.1% in March, while the lagging indicators increased 0.1%. These statistics indicate some near-term slowing of the domestic economy, moving towards the Fed’s projected 2.0% growth rate.
- The global economy continues to show signs of slowing. The IMF (International Monetary Fund) cut its forecasts for world economic growth in 2019 to 3.3%, from 3.6% in 2018. The IMF forecast for 2020 remains at a 3.6% growth rate.
- Inflation remains mostly benign with U.S. inflation at 1.9% in March, slightly up from 1.5% in February. We expect the U.S. and global inflation rates to increase modestly over the next several years, as commodity and energy prices have been moving higher.
- The Fed has taken a “wait and see” approach as they do not wish to slow the economy. With low inflation, reasonable growth, and record levels of employment, the Fed will hold rates steady for the near term. Eventually, the Fed will be forced to continue raising rates as they need to reduce their balance sheet, which is currently under $4 Trillion.
- The unemployment rate was 3.8% domestically in March, an increase of 0.1% from the previous month. Unemployment is projected to increase modestly over the next several years.
Investment Strategy Moving Forward:
- CASH – Money market funds are now paying rates just above 2.0%. Notwithstanding, yields on many savings accounts are still well below 1.0%. For now, our cash allocations remain low.
- BONDS – The Fed has made it abundantly clear that they intend to raise rates for an extended period to lower their balance sheet but will only do so if the economic data indicates. With that in mind, we will avoid long-term bonds as rates continue to rise. Our approach is to hold short-duration bonds in the portfolios for the foreseeable future. International bonds should do well as central banks will need to refrain from raising rates to protect their fragile economies.
- STOCKS – Looking forward, our outlook remains positive in equities. Due to continued GDP growth, reasonable valuations, low unemployment, and improving consumer demand, stocks look favorable.
- Domestic Large-Cap stocks, our largest asset class, should continue to benefit most from the strong U.S. economy. Small-Cap stocks may experience some headwinds as their valuations have become expensive.
- European stocks remain attractive for the long-term as their valuations are cheaper than the U.S. markets. The European economy is facing headwinds as the ECB (European Central Bank) is cautiously reducing monetary stimulus. There is still much uncertainty over Brexit and growth remains tepid with expectations for 2019 GDP in the Euro Zone at 1.3%.
- China seems to be improving as their stimulus program is stabilizing the economy, and trade tensions have been reduced. Economic growth in China should remain at or above 6% for 2019.
- Growth in Asia continues to improve. Asia is expected to grow by 5.5% this year, accounting for nearly two-thirds of global growth.
- With the increasing inflation rate, we believe commodity-based asset classes (Energy and Precious Metals) should have good growth potential in the years ahead.
- Lastly, technology-based equities should do well in an improving economic environment with lower market valuations.
We remain positive on domestic and international economies. Domestically, we expect the consumer will add to overall growth with unemployment at historically low levels. Internationally, market valuations are not as lofty as the U.S. providing more room to grow. Overall, there are little indications of a recession in any of the developed economies.
At this point in the economic cycle, we expect continued global growth with low-to-slightly higher inflation. There are no meaningful indications of an economic recession occurring in the near-term. The Fed’s decision to not increase interest rates in the near-term should bode well for the economy. As such, we continue to maintain a bullish stance moving forward.
Please let us know if you have any questions on the overall strategy and holdings in your personal portfolio. We are always happy to chat about your individual financial situation. We greatly appreciate the confidence you have shown in our services. Thank you for your business!