Our goal is to keep you well informed about what’s happening in the markets and economy so you’re more in control of your financial future. Here is a brief recap of what has been going on over the last month or so and what we expect in the month ahead. As always, if you have questions or concerns, don’t hesitate to contact us.
Fixed Income – On March 22nd, the 10-year Treasury yield dropped below the 3-month Treasury yield, otherwise known as a yield curve inversion, where short-term rates are above long-term rates. Investor concern piqued sharply, as a yield curve inversion has preceded the last seven recessions. However, the inversion was short-lived and has been dubbed a “false positive” as the episode ended on March 29th, for a total of five trading days. False positives from short-lived Treasury yield inversions tend to take place in late-cycle economic expansions. According to Bloomberg, in reviewing past recessions since 1970, the average number of 10-year/3-month yield curve inversions that have taken place before a recession is eight. If the US economy continues to stabilize, we feel it will provide support for long-term rates moving forward. Although a yield-curve inversion has traditionally been used as a signal of overall economic health, it is much more predictive of a recession when a greater proportion of the short-term curve yields are higher than long term rates. We will continue to monitor Treasury rate movements on an ongoing basis. While an inversion of the curve is concerning, the quick five-day recovery displays impact from trading more so than economic anxiety.
Equities – Short term momentum continues to keep the bulls running into the spring, as the S&P 500 began the first five days of April closing higher than their opening prices. According to Bloomberg, the last time a quarter began with five straight days of positive return was late 2007. The past three months have been the strongest since the beginning of the current expansion in 2009, and although April has historically shown to be the best performing month for the S&P 500 over the last 20 years, we would not be surprised by some short-term consolidation due to the strong performance carried since the lows of the 2018 correction. According to Bloomberg, since 1950 the S&P 500 has achieved greater than a 10% return during the first quarter of any given year eleven times, with Q1 2019 being the twelfth occurrence. Each of these eleven previous years of double-digit Q1 growth experienced a drawdown later in the year, with the average being -5.57%. However, every one of those eleven years finished positive, with only 1987 ending with less than double-digit returns. Therefore, future volatility should be expected with the understanding that a potential opportunity for positive returns lies ahead.
Foreign – Global equities enjoyed a strong start in Q2 as renewed US-Chinese trade hopefulness coupled with relatively upbeat economic data such as eurozone services data and Chinese manufacturing activity provided optimism for investors. On Wednesday, April 10th, Treasury Secretary Steven Mnuchin stated in an interview that both the US and China agreed to establish enforcement offices that will handle ongoing matters as they unfold. Trade agreements are only as valuable as their ability to be enforced, and the agreement to create a lasting mechanism to fulfill this duty reflects progress not yet seen. The relief in trade tensions between China and the US has provided optimism in domestic, developed foreign, and emerging markets. Also on April 10th, EU leaders deliberated for nearly six hours before granting their approval to the U.K. to delay its decision to leave the EU through October 31st. Although uncertainty remains, it appears that neither side has an appetite for a worst-case scenario “no-deal” type of Brexit. The Euro, as well as the British pound, went nearly unchanged during the following trading day, signaling resilience and support for the time being.
Economic – As the numbers come in, GDP forecasters are predicting Q1 to be the slowest growing quarter in three years with an expected growth rate of 2%. However, leading indicators are showing optimistic results for Q2. Possibly the most widely referenced leading economic indicator, initial jobless claims, continue to move lower. Historically, jobless claims increase before an economic peak, and the latest reading of 217k jobless claims was near its lowest since the beginning of the current. However, more jobs are currently available in the US than there are jobless, which is a sign that there could be more room to grow in the current expansion. The Conference Board’s Leading Economic Index (LEI) most recent reading, which aggregates ten economic indicators is positive year-over-year, which speaks to the overall economic strength in the US. Inflation expectations remain low, and the Federal Reserve has signaled they may keep interest rates unchanged for the remainder of the year. We feel this will provide breathing room for the US economy to stabilize from its GDP slowdown and continue to expand.
Looking Ahead: As the Federal Reserve continues to back off the implementation of future rate hikes, we believe it will provide the economy with an opportunity to grow from the softness observed in Q1. Currently, we are not concerned with the probability of a US recession within the next six to twelve months. Q2 will be an important transition for the market as it comes off the heels of a strong first quarter as well as the economy as leading indicators signal stronger growth to finish out the first half of 2019. Globally, trade discussions between China and the US are expected to move into the implementation phase which could provide relief to emerging, developed, and domestic markets.
Bottom Line & Course of Action: Clients Only
Your TVFP Team
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