2019 First Quarter Market Commentary

Financial markets seem to have emerged from a dark winter, with Q1 seeing strong rebounds in performance after last December’s steep sell-off. US stocks advanced +14.0% in Q1 as measured by the Russell 3000 index, recovering nearly all of its losses from the prior quarter. International stocks also logged double digit gains, with the MSCI ACWI ex-US Index gaining +10.3% on the quarter.

 Emerging markets were not far behind, with the MSCI EM Index up +9.9% for Q1. Bonds performed solidly, with the Bloomberg Barclays US Aggregate Bond Index gaining +2.9% during Q1 on the back of falling interest rates. In fact, we briefly saw a rare “inversion” in the yield curve, with 10-year treasury rates filling below their 3-month counterparts, a sign that investors may anticipate rate cuts as a result of waning global growth.

 Far more important to us than explaining past performance is dissecting what the data is telling us about the future. For instance, how to we reconcile a rebounding stock market with global growth concerns? As always, we aim to filter the news and noise through the lens of our “Three Dials” framework. Below is a primer on where each of our primary indicators stand after the first quarter of the year:

1. Economic Fundamentals: Positive (unchanged from last quarter)

While the aforementioned yield curve inversion (long-term rates dipping below short-term rates) is a popular recession indicator, the brief inversion that began on March 22^nd reversed before quarter-end, appearing to signal a short-term aberration rather than a long-term bellwether of economic decline. In fact, the National Financial Conditions Index published by the Chicago Fed paints a rather accommodative picture, dispelling the notion that an overly tight financial system will choke off economic growth. Economic indicators continue to point towards growth, and as such our Fundamental Dial remains in a “Positive” position

2. Market Sentiment and Momentum: Neutral (upgraded from “Negative” last quarter)

Market participants tend to vote on the direction of equities and the economy with their dollars, and the broad-based buying activity seen in Q1, which erased much of the damage done at the end of 2018, suggests that the outlook for stocks has brightened materially. Key technical levels in the market have been recovered, and the American Association of Individual Investors sentiment survey is back to within a stone’s throw of its long-term average. While work remains to be done to hit new highs in the markets, these signs indicate that our Market Sentiment and Momentum Dial has moved back into a “Neutral” position

3. Valuation: Negative (unchanged from last quarter)

We have often harped on the rich valuation in the high-growth tech sector, though even the blue-chip Dow Jones Industrial Average, which does not include any of the fabled “FANG” stocks, shows a record high median Enterprise Value-to-Sales ratio. Paying an elevated price now tends to depress future returns, and as such our Valuation Dial remains in a “Negative” position.

On balance, our Three Dials composite reading takes a “Neutral” stance, as recent improvements in equity markets are balanced by valuation concerns.

Sources:

https://www.nytimes.com/2019/03/20/us/politics/fed-rates.html

https://fred.stlouisfed.org/series/T10Y3M

https://www.chicagofed.org/publications/nfci/index

https://www.aaii.com/sentimentsurvey/sent_results

https://thefelderreport.com/2019/04/10/the-most-pervasive-valuation-extreme-in-stock-market-history/