Market Update: First Quarter 2019

It seems like just yesterday that stock markets across the globe were in freefall, with the Dow Jones Industrial Average falling 500+ points a day for what felt like days on end. The long, painful market decline in the last quarter of 2018 seemed to promise more of the same for the new year of 2019, but as of the end of the first quarter, the results couldn't have been more different. The US market, measured by a variety of indices, posted its biggest one-quarter gain since the third quarter of 2009. This proves once again (as has been proven MANY, MANY times over) that you cannot extrapolate market returns from one month or one quarter to the next, or expect that down or up trends will only lead to more of the same.

The fourth quarter and first quarter were almost mirror images of one another. In the final three months of 2018, we saw a sea of red numbers with nearly all asset classes falling in value. In the early months of 2019, just about every investment asset rebounded dramatically. Here in the US, large company stocks and small company stocks were up 14-15%. Foreign stocks also bounced back, delivering nearly 10%. Real estate investments actually led the way, posting a 16% gain in the first quarter.

Asset Class Q4 2018 Q1 2019
US Large Caps -14% 14%
US Small Caps -19% 15%
Int'l Developed Stocks -13% 10%
Emerging Markets Stocks -8% 10%
Real Estate -6% 16%

These are, by any measure, extraordinary returns for a short three-month investment horizon, and nobody should expect that returns will continue at this pace for the full year. But the remarkable resurgence in stock prices does offer a valuable lesson. Investors who took the December opportunity to buy stocks when they suddenly (and somewhat unexpectedly) went on sale are undoubtedly cheering their own objectivity in the face of near widespread pessimism. Selling into that downturn hoping to avoid more losses was, yet again, a losing strategy.

What's Next?

Will the first quarter stock party continue? Who knows? The next few months will see many companies post their first quarter earnings per share, and profit growth is expected to be lower than the torrid growth rate of the first quarter in 2018. This could slow down the hot stock market. Nevertheless, slower profit growth is still growth, which suggests that a recession is not on the immediate horizon. We continue to see record low unemployment levels; inflation is being kept in check, and interest rates remain historically near their lows. A very recent decline in interest rates saw 30-year mortgage rates once again approach 4%. Lower interest rates are always good news for the housing market.

Investors are also watching the new round of US-China trade negotiations, hoping for a breakthrough that would restore disrupted supply chains around the world. While there is no deal yet, the fact that both countries have held off on new tit-for-tat tariffs is a positive development. Additionally, there are indications that the two economic powers are working on a deal that could be completed by mid-year.

What has also helped markets and may continue to support them is the complete 180 the Federal Reserve (Fed) has made with regards to its interest rate policy. In the December meeting, the Fed indicated that it was prepared to continue raising rates into 2019, even in the face of slowing growth and recession fears. Fortunately for investors, the Fed changed its tune in January indicating that they would take a more patient approach with rate increases this year. This was wildly applauded by investors and has certainly provided support for the rebound in stock prices from their Christmas Eve low.

If the Federal Reserve continues to take a market-friendly position, we see positive developments on the trade front, and the slowing of global growth is a temporary slowing, we very well could see the first quarter rally continue into the year.

As always, there are risks out there; those we know about and those we don’t. However, it’s important to remember that most of these feared “risks” are fleeting. Does anyone remember the longest government shutdown in US history? That 35-day partial shutdown was THIS year. There were concerns at the time that the shutdown would dampen economic activity. The partial government shutdown certainly disrupted activity but didn’t appear to do any permanent damage. Whether it’s a government shutdown, rising interest rates, further trade tensions, or an unpredictable president, remember that whatever happens, we can trust that this too shall pass – just as it always has in the past.

Key Takeaway

One takeaway from the last six months is that the stock markets can be remarkably humbling. When US stocks fell as much as 20% at one point during the fourth quarter, most investors felt in their gut like the market was in the midst of a major collapse. With the benefit of 20/20 hindsight, we now know that the market selloff was an over-reaction. We have since seen a rally in stock prices which delivered one of the best first quarter return for stocks in years. Investors who react emotionally – when markets are soaring or falling – are almost guaranteed to get in and out of stocks at the wrong time.

Instead of focusing on monthly or quarterly market movements, investors are better off keeping a long-term perspective. We must remember that quarters like the fourth quarter of 2018 and the first quarter of 2019 do not continue indefinitely into the future. That’s not how markets work. They go up, and they go down (up about twice as often as down). Understanding this can help you keep short-term volatility in proper perspective and hopefully allow you to stick to your well-thought-out long-term plan.

As always, please feel free to reach out to us with any comments or questions about the markets, your planning, or your portfolio.


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