1Q2019 Brought a Welcome Reversal

| April 11, 2019
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Last year, Barron’s published a group of market strategists’ expectations for 2019 performance. The article came out in mid-December, before the steep year-end stock market decline. At that time, all of
the strategists agreed: The S&P 500 Index would move higher during 2019.

Their expectations appeared to be wildly optimistic when the Index lost 3.5 percent during the last two weeks of 2018, and finished the year down 6.2 percent.

Overall, at the end of 2018, strategists expected the Index to reach 2,975 by year-end 2019. Despite starting 2019 at a lower level than many anticipated, the Index finished last week at 2,892, a gain of about 15.4 percent year-to-date, and 83 points from strategists’ full-year performance expectations.

While the U.S. stock market has delivered attractive returns year-to-date, suggesting investors anticipate strong economic growth ahead, the bond market has been telling a different story.

Late in the first quarter, the yield curve inverted, which means the yield on short-term Treasury bonds was higher than the yield on long-term Treasury bonds. Inverted yield curves are unusual because investors normally want to earn a higher yield when they lend their savings for longer periods of time.

In some cases, inverted yield curves have been a sign that recession is ahead. That may not be the case this time, reported Eva Szalay of Financial Times. It seems the extreme measures taken by central banks following the financial crisis may have undermined the yield curve’s predictive value:
“…according to a new piece of research from Pictet Wealth Management, the curve has been sending out misleading signals for a while. The distortions created by extraordinary post-crisis monetary policies have led to the breakdown in the relationship between interest rate expectations and economic growth, the firm argues…Since central banks have injected vast amounts of liquidity into their respective economies to compensate for lackluster growth, long-term interest rates
have become artificially compressed…So the old rule no longer applies.”

The yield curve has since righted itself.

While recession may not be imminent, there are signs economies around the world are growing more slowly. Capital Economics reported, “World GDP [gross domestic product] growth seems to have slowed sharply in Q1, but the latest business surveys suggest that growth has bottomed out in some parts of the world at least…there are very few signs of improvement in the euro-zone and the United States has clearly been suffering from previous interest rate hikes and the fading fiscal boost. Those hoping for an imminent rebound in global growth are herefore likely to be disappointed.”

Slowing growth isn’t a sign recession is imminent in the United States. Last week’s jobs report suggests the American economy is still healthy, reported Tim Mullaney of MarketWatch, even if it is
puttering along at a slower pace than many would like.

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Weekly Commentary for April 9, 2019

photo by:  growth stacked cubes   © Aydindurdu | Dreamstime.com

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