Following its worst December since 1931, US stocks produced double-digit returns during the first quarter of the year. The US economy is in a late-cycle phase of expansion, reporting solid but moderating economic growth. US-China trade talks appear to be progressing, the domestic labor market remains strong, and inflation is muted. Federal Reserve Bank policymakers are holding off on further interest rate hikes for now. The current bull market celebrated its 10th birthday in March, with US stocks up by more than 300% since early 2009. Below is a closer look at what is going on in the markets and economy.
After closing out 2018 with negative returns, US stocks rallied strongly in Q1 2019 posting a 13.6% gain. While stocks have yet to reach last year’s record highs, investors were rewarded for their perseverance and discipline. US stock performance in Q1 was the strongest first quarter performance recorded in 21 years. Foreign stocks also performed well during the quarter as international developed and emerging markets rose 10.1% and 9.6%, respectively.
News that the Fed will forego rate hikes for the year has led to bond values rising across the board. The Fed’s March announcement caused the 10-year US Treasury yield to drop below 2.4%, from 2.7% at the start of the year. As yields decrease, bond values increase, making the Fed’s dovish approach to interest rates good news for bond investors. For the quarter, US taxable bonds rose a strong 2.9%, and tax-free municipal bonds were up 2.2%
The US economy accelerated 2.2% in 4Q 2018, signaling a slowdown from the previous quarter’s 3.5% growth rate. Over 2018 as a whole, the economy grew a solid 2.9%, up from 2017’s 2.2% pace. While economic fundamentals remain healthy, unresolved global trade disputes and slowing growth in Europe, China and Japan create a drag on US growth. The Federal Reserve Bank and Congressional Budget Office both expect slower growth for 2019.
US unemployment continues to be low, dropping from 4% in January to 3.8% in February. Only 20,000 jobs were added in February, far less than the 180,000 expected. However, seasonal factors along with the government shutdown may have contributed to the weak report. Wage growth continues to gain steam with a 3.4% increase in February.
US corporate earnings growth is slowing. Q4 2018 earnings rose 17% year-over-year. However, Q1 2019 earnings estimates are under pressure and pointing toward the first contraction since 2016. The waning effects of tax reform, a strong US dollar, and international trade concerns have worked in tandem to lower analysts’ estimates. Fewer companies exceeded analyst earnings expectations in 4Q, while still staying within the normal range.
After five successive quarters of rate hikes, the Fed took a dovish turn in March, citing slowing economic growth. The Fed expects no interest rate hikes this year and just one increase in 2020. In anticipation of slowing household spending and business investment, the Fed revised its growth forecast down to 2.1% for 2019. Central banks around the globe are reverting to more accommodative monetary policies amid sluggish economic growth. The European Central Bank recently indicated that interest rates will likely remain at current levels for the remainder of the year due to its trading partner China’s economic slowdown.
The Fed has not been able to reach its 2% inflation target and has lowered its inflation estimates for 2019. The Fed’s most closely followed inflation measure, the personal-consumption expenditures index, rose just 1.8% year-over-year in January. Other inflation indices, including the Consumer Price Index, are also reporting below 2% increases.
The US economy is in the late phase of a 10-plus year expansion. While economic fundamentals remain healthy, the rate of growth is slowing in China, Europe, and Japan. Central banks are responding by easing monetary policy and interest rates to encourage spending and investment. Slowing growth does not mean recession is imminent. Q1 highlighted that stock and bond markets can continue to grow as the economy slows. We are mindful of the various headwinds capable of dampening market performance. However, history shows us the mistakes of trying to predict market cycles and performance. Your investment portfolio has been carefully designed to reflect your risk tolerance and financial goals. Meeting those goals is premised on our philosophy of a disciplined, diversified, balanced, low-cost investment management strategy.
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