As bad as the fourth quarter of 2018 was for the stock market, the first quarter of 2019 was almost as good. Since the five percent washout on Christmas Eve, the S&P 500 has risen 25 percent and, as of this writing (5-22-19), major U.S. market indexes are within a few percentage points of their all-time highs. In our 2018 review/2019 preview, we mentioned three factors that were weighing on the economy and markets: rising interest rates, slowing global growth and U.S. trade skirmishes with several countries. Some progress has been made, but many questions, as always, remain.
The Federal Reserve raised short-term interest rates four times last year, making a total of eight increases since December 2015. Expectations for three more hikes in 2019 led many to believe the Fed would go too far, forcing the US economy into recession. Then, pressured by tumbling stock prices, subdued inflation and slowing global growth, The Fed revealed their plan was “flexible” and they would be “patient” with further rate increases. It is not clear how central banks will react if the global economy continues to soften, but domestic markets cheered (loudly) the Fed’s more pragmatic stance.
Since the middle of 2018, U.S. economic growth dropped three out of four quarters, while moderating activity and heightened geo-political risks clouded global economic prospects. Trade tensions remain elevated and unsettled, the most troubling for markets being the considerable uncertainty surrounding the U.S.-China relationship. The dispute with China is broad and complex, as it touches on predatory business practices such as spying and intellectual property theft, as well as cultural differences. A temporary cease fire is in place, but markets remain skeptical whether the U.S.-China relationship can be put on a better path.
Our crystal ball is no clearer than anyone’s, and the ultimate outcomes of the above issues–and others that are sure to pop up–are unknowable. However, we do know that stock prices are (on average) 25 percent higher than they were last December, and we believe that has given us another good opportunity to help clients review their asset allocation to make sure it is consistent with their stated goals and objectives. At some point the economy will go into recession and stocks will go down, maybe a lot. Being prepared for that inevitability will help avoid the type of emotional decision making that can be so detrimental to one’s financial health.
As always, we truly appreciate your confidence and trust.
The Glenview Trust Company