Q1 2019 RECAP
April 1, 2019
Q1 2019: THE S&P 500 RECORDS 3rd POSITIVE MONTH, UP 13% YTD. 10-YR T-NOTE AT 2.41%.
FED’S 2nd MEETING AS CONSEQUENTIAL AS THE 1st – NO RATE HIKE IN 2019, GDP + INFLATION FORECASTS LOWERED…STIRRED THE TREASURY MARKET, YIELDS PLUMMETED, PARTIAL YIELD CURVE INVERSION FOLLOWED. CRUDE OIL RALLIED. U.S. DOLLAR HELD NEAR HIGHS.
A reversal of fortune orchestrated by the Fed! And so it was as risk-on assets recorded a record opening 3 months. U.S. equity markets saw double-digit gains, their best in a decade! The S&P 500 began its recovery the final week of 2018 after barely avoiding a bear market decline, and continued to rise with few stumbles through March. The Nasdaq on the other hand could not avoid a bear market (20% decline from its high), yet recovered even faster through quarter-end. Overseas, the storyline was much the same, with major developed and emerging markets enjoying strong rebounds.
In the background was the Federal Reserve. On the 1st business day of 2019, Apple Computers warned the company would not match earnings forecasts. The culprit, a slowdown in the company’s sales in China. The next day world markets lost ground, with the Dow Jones down more than 600 points. The following day was a key day, for in the 3rd business day Jerome Powell, head of the Fed, reversed course, reversing December’s narrative, and pronounced that for now, the bank would place a hold on interest rate increases, and, that going forward they would exercise much patience on when to lift interest rates once again. After a severe decline just after December’s meeting, this total turnaround to open the New Year was an unexpected surprise. Markets immediately responded, the Dow rising more than 700 points, erasing the previous day’s fall. From that point forward, January was a special month for not just stocks, but crude oil too. U.S. equities posted their best January in three-decades.
February saw a continuation of the main storyline, with the added feature of renewed optimism on US—China trade talks. Enough of an economic slowdown, reflected in the data on both sides of the Pacific, seemed to draw the rivals closer to a negotiated deal. Senior-level delegations met on a continuous basis throughout February and March. At quarter-end, two days of meetings included ‘new progress’ (quote from Chinese delegation). Next, to be followed another round in Washington.
Though not a straight-line, an impressive recovery of the 4th-quarter continued. Commodity prices benefitted, oil marked a new bull market, bouncing back, with WTI closing at $60 a barrel. This after tumbling more than $30 late the previous year as the Fed methodically hiked short-term rates each quarter. Precious and industrial metals regained lost territory as well.
Bond yields was the other big story to unfold. Treasury yields had closed well-below multi-year highs, with the gap between the 2-yr and 10-yr uncomfortably tight in historical terms. It remained fairly stable through much of the time period until the Fed’s 2nd meeting. For the next week yields tumbled to new lows, indeed lows not seen since the beginning of 2018. In that time, an inversion between the very short-end if the curve (the 3-month) and the 10-yr note heightened markets concern on the possible implications. History tells us that inverted yield curves lead to recessions, though the timing and degree are unknown. But, it has been a leading indicator, as was the case before the financial crisis a decade ago. That said, the partial inversion was not pronounced enough (so far), and eased back last Friday so that the yield on the 10-yr t-note ‘closed’ above that of the 3-month t-bill. A bit of relief last on the final day of Q1, but will continue to be monitored by bond investors as we step into Q2.
Finally, when all is analyzed, all begins with the Fed’s stunning about-face. Mr. Powell’s words right from the start set a different tone, were later confirmed at subsequent FOMC meetings thus propelling markets sharply higher. Dovish replaced hawkish across-the-board…primarily on the inflation outlook, but also an expected moderation of the US economy, and an acknowledgment that Europe and China are in slowdown mode, the former more so. Consequently, the greenback has stayed mostly range-bound though the home currency revalued versus the euro and yen in Q1. Meanwhile, EM currencies benefitted from the Fed’s newfound benign outlook on interest rates.
THE TWO PILLARS IN Q1: FED DELIVERED ON PROMISE. HOW MUCH OF U.S.-CHINA AGREEMENT DISCOUNTED?