Quarterly Market Review: Q1 2019

You Know Nothing, Jon Snow

I am definitely late to the party, but I'm all caught up and ready for the final season Game of Thrones. The writing for the show is just so good. While I know more than Jon Snow, I often tell people that in our line of work, there is a lot we can't know, and I had to accept that long ago. When it comes to the markets, things change quickly, for some or no reason, and it can be hard (impossible) to pinpoint the reason(s) why it does what it does. For the last three months, we’ve gotten to enjoy quite an ebullient market. The U.S. stock market was up 14.04% in the first quarter of 2019. If you simply go back to December of 2018, we were experiencing a 14.30% drop in the market!

So, what’s changed? A lot… and nothing! In the “a lot” column, we could include a changing perspective on interest rates from the Federal Reserve as a critical event. In the latter part of 2018, rates were rising around the world, the Fed was signaling additional rate hikes in the U.S. There was a fear that the Fed was raising rates too much just as economic conditions seemed to be peaking. Fast forward three months, and the Fed has indicated a reversion back to caution. Interest rates around the world dropped significantly, and the fear of inflation is a worry of the past.

Interesting, and somewhat concerning, is that $9.7 trillion of government debt around the world is now trading with yields BELOW 0%. That means investors in Germany, Japan, and many other countries, are paying for the privilege of loaning money to their government. That is not how it’s supposed to work! Imagine a bank paying you interest for ten years if you take out a mortgage with them. This is a financial abnormality that should not persist.

In the “nothing changed” column, we still have a respectably strong economy and labor market (196,000 jobs were created in March vs. 175,000 expected), low inflation, no trade deal with China, plenty of political division, and ever-present discussions about a looming recession.

In short, it can be said that markets are fickle – and thus our aversion to try to predict them! To illustrate how unpredictable markets can be, here are some interesting data points about recessions and market returns:

There have been 21 bear markets (20%+ drops) since 1929. Nine (42.8%) did not lead to a recession.
Historically, by the time a recession ends, stocks have already gone up about 30% on average.
Economic cycles are only known after the fact. The National Bureau of Economic Research (NBER) takes about 15 months to identify the peaks and troughs of economic activity.
The average return during the 15 months from the low point in the stock market until the NBER announces that a recession occurred has been 66%!

There is never a shortage of speculation, but there’s no way to know when a recession is indeed coming. A client recently asked me if their portfolio was prepared to handle a future recession. My answer for all of our clients is that we construct portfolios specifically to provide proper diversification and risk management while taking your specific needs for growth into account. That is the key. Our goal is to control what we can control and invest in a way that works for you and your needs. It is proper diversification, combined with patience and discipline, that works over the long term.

So with that, cheers to everyone for a happy Spring 2019!

Economic Indicators at a Glance

Below you’ll find a snapshot of some top-line economic indicators, followed by the Quarterly Market Review.

Data source: Trading Economics. 2019.

Market Summary First Quarter 2019 Index Returns

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]). S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2019, all rights reserved. Bloomberg Barclays data provided by Bloomberg.

World Stock Market Performance

MSCI All Country World Index with selected headlines from Q1 2019

These headlines are not offered to explain market returns. Instead, they serve as a reminder that investors should view daily events from a long-term perspective and avoid making investment decisions based solely on the news.

It is not possible to invest directly in an index. Performance does not reflect the expenses associated with management of an actual portfolio.

Past performance is not a guarantee of future results.

World Asset Classes

First Quarter 2019 Index Returns (%)

Equity markets posted positive returns around the globe in the first quarter. Looking at broad market indices, US equities outperformed non-US developed and emerging markets.

Small caps outperformed large caps in the US and non-US developed markets but underperformed in emerging markets. Value stocks generally underperformed growth stocks in all regions.

REIT indices outperformed equity market indices in both the US and non-US developed markets.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. The S&P data is provided by Standard & Poor's Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2018, all rights reserved. Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).

U.S. Stocks

First Quarter 2019 Index Returns

US equities outperformed both non-US developed and emerging markets. Small caps outperformed large caps in the US. Value underperformed growth across large and small cap stocks.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Marketwide (Russell 3000 Index), Large Cap (Russell 1000 Index), Large Cap Value (Russell 1000 Value Index), Large Cap Growth (Russell 1000 Growth Index), Small Cap (Russell 2000 Index), Small Cap Value (Russell 2000 Value Index), and Small Cap Growth (Russell 2000 Growth Index). World Market Cap represented by Russell 3000 Index, MSCI World ex USA IMI Index, and MSCI Emerging Markets IMI Index. Russell 3000 Index is used as the proxy for the US market. Frank Russell Company is source and owner of trademarks, service marks, and copyrights related to Russell Indexes. MSCI data © MSCI 2019, all rights reserved.

Real Estate Investment Trusts (REITs)

First Quarter 2019 Index Returns

Non-US real estate investment trusts outperformed US REITs in US dollar terms.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Number of REIT stocks and total value based on the two indices. All index returns are net of withholding tax on dividends. Total value of REIT stocks represented by Dow Jones US Select REIT Index and the S&P Global ex US REIT Index. Dow Jones US Select REIT Index used as proxy for the US market, and S&P Global ex US REIT Index used as proxy for the World ex US market. Dow Jones and S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

Select Country Performance

First Quarter 2019 Index Returns

In US dollar terms, Hong Kong and Canada recorded the highest country performance in developed markets, while Japan and Singapore posted the lowest returns for the quarter. In emerging markets, Columbia and China recorded the highest country performance, while Turkey and Qatar posted the lowest performance.

Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Country performance based on respective indices in the MSCI World ex US IMI Index (for developed markets), MSCI USA IMI Index (for US), and MSCI Emerging Markets IMI Index. All returns in USD and net of withholding tax on dividends. MSCI data © MSCI 2019, all rights reserved. UAE and Qatar have been reclassified as emerging markets by MSCI, effective May 2014.

Fixed Income

First Quarter 2019 Index Returns

Interest rates decreased in the US Treasury fixed income market during the first quarter. The yield on the 5-year Treasury note declined 28 basis points (bps), ending at 2.23%. The yield on the 10-year Treasury note decreased 28 bps to 2.41%. The 30-year Treasury bond yield fell 21 bps to finish at 2.81%.

On the short end of the curve, the 1-month T-bill bill yield was relatively unchanged at 2.43%, while the 1-year T-bill yield dipped 23 bps to 2.40%. The 2-year Treasury note finished at 2.27% after a 21 bps decrease.

In terms of total returns, short-term corporate bonds gained 1.83%. Intermediate-term corporate bonds had a total return of 3.82%.

Total returns for short-term municipal bonds were 1.33%, while intermediate munis gained 2.78%. Revenue bonds outperformed general obligation bonds.

One basis point equals 0.01%. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Yield curve data from Federal Reserve. State and local bonds are from the S&P National AMT-Free Municipal Bond Index. AAA-AA Corporates represent the ICE BofAML US Corporates, AA-AAA rated. A-BBB Corporates represent the ICE BofAML US Corporates, BBB-A rated. Bloomberg Barclays data provided by Bloomberg. US long-term bonds, bills, inflation, and fixed income factor data © Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield). FTSE fixed income indices © 2019 FTSE Fixed Income LLC, all rights reserved. ICE BofAML index data © 2019 ICE Data Indices, LLC. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

This report was prepared by Gregory Saliba.