April 10, 2019

The first quarter was a mirror image of 2018. Stocks went back to beating bonds and six out of eight major asset classes posted gains of at least 5%. A typical U.S. 60/40 portfolio (S&P 500 Total Return/Barclays U.S. Aggregate Bond Total Return) put in a strong performance for the quarter at 9.29%, above its long-term historical gain per annum of 7.77%, and recouped the losses from Q4 and more.

04-10-2019 SPY


The cause of the market’s reversal is open to de­bate. Was it central banks, led by Fed Chair Powell, pivoting from tightening to easing modes? Was it the prospect for a trade war solution? Or was it the realization that the market had priced in the worst-case sce­nario on Christmas Eve? The answer is likely “all of the above.” More importantly, as the market moves into the second quarter, signs of deterioration in any of the above could be the catalyst for a pause before a run at the old highs.

  • Stocks beat bonds, with the S&P 500 Index up 13.07%, over 9% more than the Barclays Long-Term U.S. Trea­sury Bond Index.
  • Globally, it was the same, as the All-Country World Index beat out global bonds.
  • The Nasdaq Composite was a top performer, posting a 16.5% gain in the quarter.
  • International stocks gained, but trailed the U.S.
  • China was a standout within Emerging Markets, gaining 17.84% in local currency terms, recovering much of 2018’s 20.3% loss.
  • Commodities were mixed. The widely followed S&P Goldman Sachs Commodity Index jumped 16.0%.
  • The 30.7% surge in crude oil masked weakness elsewhere.
  • Gold gained only 1.1%.

Dollar-denominated assets were hurt by a stronger U.S. dollar. In late March, investors became concerned about an inverted yield curve (when longer duration Treasuries yield less than shorter duration ones). The yield curve is inconsistent. The benchmark 10-2, for example, has not yet inverted, and the curve steepens sharply after five years.

The market is way out in front of the Fed, fully pricing in a rate-cut within a year. However, the market is not always right. Market and Fed expectations need to converge at some point. In 2017, the market moved toward the Fed, while the Fed is moving toward the market so far this year. Although every recession since 1960 was preceded by a curve inversion, not every curve inversion led to a U.S. recession (as in 1966 and 1998).

Investors shouldn’t get complacent about the tightening cycle being over. Market-based inflation expectations have moved modestly higher this year. And core inflation (the change in prices except food and energy) could remain sticky due to strong housing demand. 

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