February Market Update 2019
Markets worldwide continued to gain ground this month on ongoing assumptions of progress in U.S.-China trade talks and signs that Federal Reserve policymakers will stick to a wait-and-see approach before raising interest rates further.
If it feels as if the stock market has been calm of late, it has been. Volatility is down—albeit from the relatively high level we endured at the end of 2018. The VIX index, known as Wall Street’s “fear gauge,” has declined in 23 of 35 trading days in 2019. The S&P 500 index and Dow Jones Industrial Average haven’t moved by more than 2% in a single day since the year’s first three trading sessions.
While it’s easy to say now, we also said it as it was happening: Investors and traders overreacted in the fourth quarter. The consensus view on a range of issues was so pessimistic that things didn’t need to get better to re-engage traders; they just had to keep from getting worse. That’s what we’re seeing eight weeks into 2019.
Merely not getting worse is not going to be good enough to power a further recovery in stock and bond prices, though. Investors will want to see actual progress on a variety of concerns—trade disputes, the Mueller investigation, Brexit, recession risks in Europe—and fundamental economic data that supports continued growth.
For the year through Thursday, the Dow Jones Industrial Average has gained 11.6%, while the broader S&P 500 has returned 11.5%. The MSCI EAFE index, a measure of developed international stock markets, is up 9.3%. As of Thursday, the yield on the Bloomberg Barclays U.S. Aggregate Bond index has dipped to 3.21% from 3.28% at 2018’s end. On a total return basis, the U.S. bond market has inched up 1.0% for the year.
Nerve-wracking headlines haven’t unnerved investors. The news cycle this week included an abrupt end to a meeting between President Trump and North Korean leader Kim Jong Un, military action flaring between India and Pakistan and Michael Cohen’s tempestuous testimony before Congress.
On the flip side, trade talks between the U.S. and China continue to lend cautious optimism to investors as the administration has backed away from imposing another round of import tariffs this month. The current narrative is that negotiations are going well and a positive outcome is expected soon.
All of that headline static may have drowned out the news that fundamentals (earnings, interest rates and economic data) remain extremely bullish. This week, we got a fresh round of data on housing, consumer income, spending and savings, as well as information on the health and rate of our economy’s growth.
Stocks’ Best Decade
With recollections of the 2008 financial crisis still vivid for many investors, it may seem unbelievable that we’re about to come upon a much happier occasion: The 10-year anniversary of the ongoing bull market is just five trading days away.
It’s been a remarkable run. Stocks have compounded further and faster since the March 9, 2009 bottom than at any point since the dot-com boom. But be forewarned: Expect these high-teen 10-year returns to begin coming down over the next few weeks and months.
At last night’s close, the 10-year annualized return for the S&P was a whopping 16.7%. The last time the S&P generated that kind of number over a 10-year period was between February 1991 and February 2001.
We think the current 10-year return is likely to go higher by the end of next week—in the final few days leading up to the market’s March 9, 2009 bottom, the S&P dropped another 8%. That decline will no longer figure in the return calculation after March 9 (making it look even better), and the markets then steamed ahead through April 2009. Come May, as those early, rapid gains are no longer reflected in the 10-year numbers, they may come back down to Earth a little.
In particular, after a delay due to the government shutdown, the Bureau of Economic Analysis said the economy grew better than expected at an inflation-adjusted 2.6% pace in the fourth quarter, following 3.4% in Q3 with consumption at +2.8%, nonresidential business investment +6.2%, slower government spending, trade was a minor drag, and inventories mildly positive. Pending a final revision, that means GDP expanded 3.1% in 2018, which is a bit better than the average annual 2.6% pace of growth we’ve seen over the past nearly four decades. We don’t expect growth to continue at that pace, since the catalyst of tax cuts will now be behind us, but that doesn’t mean the economy won’t continue expanding.
Our slow-growth, not no-growth view was echoed by Federal Reserve Chair Jerome Powell in his scheduled quarterly testimony on Capitol Hill. Powell reiterated the Fed’s view that the U.S. economy remains on solid ground while acknowledging near-term political crosscurrents as potential agitators, but not disruptors, of that slow-growth line.
While we are thrilled to have experienced and profited from a decade-long run like this one, we need to keep our expectations for future returns in check, because whether it’s 16.7% or some other high-teens number, it should be viewed as a gift that only comes around, if we’re lucky, every 20 years or so.
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