Quarterly Commentary – March 2019

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The first quarter saw US Equities come back roaring on the upside from the most recent low established in late December. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 13.6% for 2019. The Dow Jones Industrial Average was up 11.8%. The Nasdaq Composite Index was up 16.8%. The Russell 2000 Index was up 14.6%. International equities as represented by the MSCI AC World Ex U.S. Index were up 10.3%. The MSCI Emerging Markets Index was up 9.9%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 2.9% for the year.

The first week of March saw a volatility surge and a move to the downside before quickly reversing course on the upside to close the quarter at higher levels. The added volatility was attributed to growth concerns over the economy and company earnings causing some fears about a possible recession. The impact on earnings growth from the tax cuts was for the most part a one-time bump on growth.

Some of the important driving forces playing on the market this past quarter have been a quick shift on the part of the Federal Reserve from raising rates in December with the intention of more hikes in 2019 to potentially being done with future hikes for the time being. There was a brief yield curve inversion which essentially happens when short term rates are higher than long term rates. This tends to be closely watched since it has historically pointed to a higher likelihood of a recession in a year or so, but it is also subject to false positives. Part of the reason it can foreshadow a recession is that under a normal yield curve environment, short term rates are lower than long term rates, allowing the banking system to function properly and earn a spread between borrowing at the short end of the curve and lending at the long end. In the case of an inversion, lending tends to come to a halt since it is less profitable, and the resulting tightened credit contributes to a slowdown in the economy. If the Federal Reserve tightens too much or too quickly, they can contribute to that inversion since they can only control the short end of the curve. The health of the economy and inflation expectations help determine the longer-term level of rates.

Ongoing trade policy uncertainty is still weighing on things however there has been progress since last quarter. It remains a key factor that will be closely watched as it has the potential to materially impact the economy both here and globally. Brexit is also a wild card at this juncture. Inflation is still well in check and interest rates remain relatively low, but it could bump up at a moment’s notice given the tightness in the labor market which can contribute to wage increases. Deflationary forces abroad would help offset these inflation concerns. Housing starts which had slowed down late last year are showing signs of life and seasonally along with lower mortgage rates should be supportive of the economy.

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