In sharp contrast to the volatile conclusion of 2018, the new year brought a rally in the capital markets. Technology stocks again were a large contributor to the gains, but the market strength was fairly widespread. Both domestic and international equity markets, as well as the broad bond market, posted decidedly positive returns for the quarter.
US Economy and Interest Rates
Here in the US, investors were tuned into the prospects for future economic growth and the actions of the Federal Reserve. While US economic data is still broadly positive, we are seeing signs of slowing growth. On a positive note, the US is experiencing upward pressure on wages, yet relatively stable core inflation. The latest reports on consumer sentiment and new home sales were also positive. However, employment growth is now trending lower after a strong 2018, and both household spending and business investment are slowing as well. As first quarter corporate earnings reports are released over the next few weeks, the markets are expecting a drop from previously robust levels. With the boost from last year’s tax cuts fading and a now-divided Congress, there is little hope of Washington spurring growth with fiscal stimulus.
The good news is the Federal Reserve (Fed) acknowledged these risks and held interest rates constant throughout the quarter. The Fed also revised their forward-looking projections to indicate no additional rate hikes this year. Their comments were a bit more “dovish” than anticipated, meaning they are more supportive of keeping interest rates low to stimulate a potentially weakening economy. Investors viewed the Fed’s responsiveness as favorable, helping to fuel the market rally. However, some investors feel the Fed may be overly optimistic and will be forced to cut interest rates this year. Time will tell what the Fed will do, but in the meantime, their actions and comments have been supportive to the capital markets so far this year.
From a global perspective, the International Monetary Fund (IMF) cut their global growth forecasts in January, after previously lowering them in October. Some of the reasons for the downward revision were trade tensions, sovereign risks in Europe, and slowing growth in China. While some aspects of Eurozone growth are showing signs of strength (stable inflation, tightening labor market, accommodative central bank policy), Brexit is still a risk. Meanwhile in Asia, economic growth in China continues to slow after significant government spending fueled decades of very high growth rates. The Chinese continue to take steps to boost domestic demand and shift to a more market-based economy. However, trade tensions between China and the US continue to be a hurdle moving forward.
What Does This Mean for You?
In summary, while economic growth is slowing, we have seen global central banks react with supportive policies, which investors are viewing as favorable. However, the market rally of the first quarter, on the heels of a volatile close to 2018, is a reminder of how quickly the financial markets can change direction. These types of swift market movements continue to support the need for a long-term investment perspective, prudent asset allocation, and a well-diversified portfolio. If you have any questions about your portfolio or would like to meet and review the information, please call our office for an appointment.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this article serves as the receipt of, or as a substitute for, personalized investment advice from Domani. A copy of Domani’s current written disclosure brochure discussing our advisory services and fees continues to remain available upon request.