April Market Update
Highlights:
- Equity market gains continued in April following one of the best first quarters in years. The S&P 500 Index ended April at an all-time closing high.
- Global equity markets continued to advance as well, but they were not able to keep pace with U.S. equities in April or for the first four months of 2019.
- The 10-year U.S. Treasury yield rose in April after hitting its lowest level in March since 2017. The short-lived yield curve inversion in late March reversed and, while rather flat, the yield curve stayed positively sloped in April.
- Economic data released in April continued to reflect an economy that we believe looks likely to grow in the months ahead. The advanced reading of first quarter 2019 GDP epitomized the positive data when growth came in at a 3.2% annualized rate compared to estimates of 2.3%.
On April 26th, according to the Bureau of Economic Analysis’ first estimate, the U.S. growth or Gross Domestic Profit (GDP) came in at 3.2% which tops forecasts based on trade and inventory boost.
The unemployment rate touched its lowest level in 50 years (3.6%) in April. Combine that fact with last week’s report showing U.S. GDP increased at an estimated 3.2% annual pace in the first quarter, and the economy looks set to continue on a steady growth path. Is it so surprising the S&P 500 index has fully recovered from the near-bear market of the fourth quarter and ended the month of April at a record high?
For the year through Thursday, May 2nd the Dow Jones Industrial Average and the broader S&P 500 have returned 13.6% and 17.1%, respectively. The MSCI EAFE index, a measure of developed international stock markets, is up 12.6%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index sat at 3.02%, up from earlier this year but down from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has gained 2.8% for the year.
U.S. economic growth accelerated by more than expected in the first quarter on a large boost from inventories and trade that offset the slowdowns in consumer and business spending, propelling hopes that growth is stabilizing after its recent soft patch. The economic expansion was driven by a sharp increase in exports, which rose 3.7%, as well as boosts to state and local government spending and higher private inventory investment. This more than made up for consumer spending, which was up 1.2% in the first quarter, but slower than the 2.5% surge at the end of 2018.
According to the Commerce Department, during the annualized rate in the January-March time period, GDP expanded by 3.2% which topped all of the forecasts which were calling for a 2.3% like the Bloomberg survey.
Consumer Spending: The biggest part of the economy is consumer spending which rose slightly-above-forecast at 1.2%, while business inventory cooled. A Federal Reserve-preferred inflation measure, the personal consumption expenditures price index excluding food and energy, slowed to 1.3%, well below policy makers’ 2% objective.
Recession Fears Are Overblown
Along with the U.S. economy’s continued expansion, corporate profit growth has exceeded analysts’ expectations in recent weeks. Despite the good news, many investors still fear a recession looms. While the current economic cycle has been one of the longest on record, expansions don’t die of old age.
Further, expansions don’t turn to recessions because talking heads predict it.
With the sharp increase in recession predictions from all manner of pundits, it’s important to remember that very few have been able to make a successful recession call in the past, and even fewer admit to all the wrong calls they’ve made over the years. At CrossPoint Wealth, we focus on the facts (earnings, interest rates, economic data) rather than fear-mongering headlines. In our view, there are no signs of impending U.S. recession.
Of course, a macro shock that harms our economic system is always possible. But we believe it is more probable that the next recession will follow the path of slowing growth, consistently negative profit growth and inflationary pressures.
The Dow Jones Industrial Average
More than 89% of the time (89.4% since March 1957, to be exact) when the Dow Jones Industrials Average is up on any given day, so is the S&P 500, and vice versa. But the week of April 22nd provided a salient example of how one bad earnings report can drive a divergence in the indexes.
On Thursday, April 25th, the Dow finished the day down 0.5% while the S&P 500 was flat. The big fly in the Dow’s ointment? Industrial giant 3M, a stable, diversified company that not only reported weak first-quarter earnings Thursday morning, but also said future earnings would not be as strong as expected and that they’d be cutting thousands of jobs.
The stock tumbled 12.9% on the news—enough to drive the two indexes apart. Incidents like these remind us that we invest in a “market of stocks, not a stock market,” as the old cliché goes. Whatever the overall performance of broad market indexes, it’s your (and your funds’) specific holdings that drive your returns. That’s also why security selection and analysis really matter and drive our investment philosophy at CrossPoint Wealth.
Despite 3M’s troubles, as we noted, earnings season has been noticeably better than analysts expected even one week ago. More than 200 of the S&P 500’s constituent companies have reported in so far.
What about Verizon’s stock? (Someone asked me this question last week so here’s my answer)
Like its closest competitor AT&T, Verizon Communication’s is a utility. Its investor base values the company for the indispensability of its service, the steadiness of the cash flows that result, and the dividends that it pays. Absent significant changes to its dividend policy, investors should expect the stock not to vary much from the broader equity market.
Verizon and AT&T dominate the US wireless market, with Verizon claiming 40% share and AT%T 30%.
Nevertheless, Verizon faces major competition, especially when technology standards change giving competitors the opportunity to offer different subscriber plans. Verizon lost 44,000 net postpaid customers during this past quarter, 24,000 a year ago in the same quarter. In order to protect its subscriber bases and these steady stream of cash flows, Verizon and its competitors are compelled to adopt 5G, the new faster mobile standard.
This continuous need to invest capital results in heavy borrowing, however, and leaves Verizon and its competitors heavily loaded with debt. At the end of the last quarter Verizon’s debt to equity was over 2, AT&T’s was less than 1, while Sprint’s was around 1.3.
Any risk to the servicing of that debt would threaten that dividend payout and dramatically hurt that stock price.
Summary: The equity market is off to a strong start this year. It would be normal for some profit taking and some consolidation. Keep an eye on leading groups and economic numbers for signs that things continue or change for the worse. For now, entrepreneurs, new technologies, tax cuts, deregulation, an accommodative fed, and corporate profits continue to benefit stocks and the economy. At this stage don’t fall into the narrative that this market must end due to being 10 years old. There is a strong view out there that this current bull market started with the Brexit vote and U.S. elections in 2016. We might be in for an expansion similar to what we saw in the early 1950s. Naturally, if markets were to violently retreat from these highs, that might negate this view. Remember markets don’t move in a straight line, but trends may persist for a very long time. Stay tuned!
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