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Investment Outlook First Quarter 2019 - Market Recap and Review 

By: Tyler J. Smith
Monday, May 6, 2019

Is good news good news, or is bad news good news?  What may seem like a straightforward question can be anything but, when it comes to the stock market.  Take, for example, the rally we have seen off the December lows.  Are stocks rising due to better business fundamentals, or is it a result of preemptive measures being taken to prevent an economic slowdown? In a bullish environment, these questions seldom get much attention.  Because at the end of the day, as long as prices are going up, who really cares what is driving them, right?   The reality, however, is that there usually comes a time when bad news is actually bad news.  For this reason, it’s worth looking at the recent stock market rally to unpack both the good, and the maybe not-so-good. 

As a quick aside, we don’t advocate trying to time the markets.  The goal here is to bring more clarity to the different catalysts propelling the market, so we can all better understand and rationalize the source of turbulence when it does occur.

Okay, back to the topic at hand.  It sure feels like we did quite an “about-face” at the start of the new year.  4Q18 was defined by wild volatility and significant daily declines, ultimately dragging market returns into the red for 2018.  Now, however, we are looking at the best first quarter for stocks since 1998.  This drastic change in sentiment in a matter of weeks can be broken down into a couple parts, each driven by a slightly different kind of news.

Part one, the initial reversal, occurred largely as a result of a change in Federal Reserve policy.  The Fed went from a strategy of raising interest rates in a lockstep fashion to a more data-dependent, “wait-and-see” approach.  Most would agree this was legitimate good news.  The economy was in good shape but wasn’t showing the signs of overheating that traditionally merit tighter monetary policy and higher interest rates.  For this reason, it could be concluded that without the Fed constantly tightening the screws, the economy could continue down the path of solid, sustainable growth.   

We can define the second part of the reversal as the subsequent rally stretching across the latter half of the first quarter.  It is here where things become a bit less clear.  One could point to many different reasons as to why the market rose over this period, but most had to do with easy monetary policy and increasing economic stimulus across the globe.  Examples include China pumping money into their economy to accelerate growth, the European Central Bank taking an accommodative stance to fight a weakening economy, and even our own Federal Reserve further reigning in its expectations of future increases to interest rates.  The initial knee-jerk reactions in each one of these cases was to buy stocks, as the excitement around reduced policy headwinds more than offset the potential growth concerns implied by the policy changes themselves.  However, it starts to beg the question of how many times we can applaud the same news of central banks and economic policy makers reacting to softer global economic conditions.  In other words, at what point does this not-so-good news about the global economy stop being good news for the stock market? 

The answer will ultimately reveal itself as companies continue to report financial results over the coming quarters.  If the global economy is indeed slowing, companies will sell less and earnings will come down.  At that point, it is very likely stock market sentiment will shift from enthusiasm around easy monetary policy, to concern about the earnings power of individual companies.  It is impossible to predict if, or when, this will happen, but having a better understanding of the “why” behind these market moves can greatly reduce the shock factor should we run into a temporary rough patch down the road. 

As always, we remain committed to our strategy of getting behind great business with great management teams that can succeed in spite the ever-changing news flow.

 

1Q19 Market Returns

Index

1Q19

S&P 500

12.9%

Dow Jones

10.9%

Nasdaq 100

16.3%

Intmd Bond Index

2.4%

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