Spring 2019

Quarterly Commentary

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What a difference three months can make! After the stock market’s weakest December since the Great Depression (a market decline of 19.4% from the highs), the first quarter of 2019 experienced the strongest bounce in over 10 years with the S&P 500 Index advancing +13.1%! The Fed’s “dovish pivot” near the end of 2018 was the primary catalyst for the market’s bull run.

As a result of Jay Powell’s change in monetary policy (dovish = lower rates / no rate hikes), 10-year U.S. Treasury rates reversed course and declined near 15-month lows to 2.34%. The decline in rates encouraged a ‘risk-on’ mentality as stock investors cheered the Fed’s pivot to flexible monetary policy. Importantly, although global economic weakness has been pervasive, we believe the U.S. can avoid a recession. If so, U.S. equity outperformance.

Economy Positives

Hooray for 4% mortgages!
The housing market, which peaked in 2018 with higher rates, has strengthened in recent months as 30-year fixed mortgage rates approach 4% – its lowest level since January 2018. Lower rates improve affordability and refinancing – both of which benefit consumers!

The productive worker reappears!
U.S. worker productivity, a key driver of our economy, recently posted a +1.9% nine-month average growth rate – its best growth rate since 2010. This is well above the +1.3% average during our current economic expansion. Bears may begin to question their recessionary fears.

Job openings approach a 19-year high!
7.34 million jobs were available in the U.S. at year-end 2018. This exceeds the amount of people looking for work by over 1 million! The data suggest that businesses are ramping up hiring & investment due to a favorable deregulatory business climate

Economy Negatives

Will the global slowdown spill over to the U.S.?
The International Monetary Fund (IMF) recently cut its global growth forecast to its lowest level since the financial crisis in 2009. IMF Director Christine Lagarde noted we face a “delicate moment” and stressed monetary policy missteps must be avoided!

Is U.S. dollar strength the next headwind for investors?
We are keeping a careful eye on the dollar’s strength and its potential negative impact on U.S. multinationals that have significant international sales. Our stronger relative economic growth & interest rates continue to attract foreign capital.

The slowdown in non-farm payrolls is flashing a warning sign.
The three-month average of non-farm payroll gains has decelerated rather dramatically from last year’s highs to +180,000 jobs per month. Was February’s weakness (+33,000 jobs) a blip on the radar or something more serious? Time will tell.

Financial Market Negatives

Earnings estimate cuts suggest pain may be in store for equities!
Wall Street is pricing in a possible recession for the U.S. economy. First and second quarter year-over-year earnings growth estimates have fallen to -3.9% and +0.1%, respectively. While the ‘bar has been set low’, how will stocks react?

The U.S. China trade deal is still unresolved.
The almost-daily positive updates on trade negotiations from the administration have helped buoy the market. A compromise deal is expected and ‘priced in’ by investors. If anything less than a solid deal (or no deal) is announced, a market dip should be expected.

Valuations are lukewarm.
After the market decline of late-2018, the market’s one-year forward P/E valuation reached a low near 15 – about a 10% discount to the 25-year average. We currently trade at 17 times earnings. This is a slight premium to norm but still not as high as we were in September 2018 at 18x.

Financial Market Positives

History is on our side!
Looking back over 50 years of market returns, the average midterm election year correction is – 19%. We experienced that late last year. However, these corrections have averaged ‘snapback’ rallies of +31% one year later and markets have never declined the following year since 1946!

The U.S. remains a safe haven for foreign capital.
Low (and positive) rates on U.S. government debt are a sign of stability and very good for stocks. Outside the U.S. there is $10 trillion of negative-yielding government debt – a sign of instability & economic uncertainty! Attracting foreign capital is bullish!

Another record year for stock buybacks?
A major driver of equity performance has been corporate stock buybacks. With balance sheets strong & interest rates low, early indications suggest that 2018’s $1 trillion of buybacks will be surpassed this year! This has the potential to limit the market’s downside.