In the opening two months of 2019, we saw the markets rally off the back of a disappointing December. The equity markets then took pause in a more tranquil March and closed the quarter up around 13%. We believe that this timely rebound from a December slump and the maturation in March reflects the market’s health and robustness. The stock market outperformed initial expectations for the first quarter with subdued volatility. Every sector contributed positive performance with technology, real estate, and energy leading the markets while materials, financials, and healthcare lagged. Healthcare stocks were among the best performers in 2018 and more recently the financial sector came under pressure as interest rates were pushed lower.
This past quarter provided clarity on several key developments including: the government shutdown, the Federal Reserve’s stance on interest rates and normalization, and progress on a U.S./China trade deal. The slowing global economy, global political polarization, and negotiation tensions like trade and Brexit remain a concern. Notwithstanding, we believe the robust U.S. economy will continue to drive the U.S. equity markets.
The trade dispute with China remains unresolved but has made some progress. The dispute has hampered U.S. based companies in key areas like capital spending and earnings growth estimates. The impact has been felt more by the Chinese, given that growth there has been its slowest since 1990. We believe a solid agreement is mutually beneficial, but progress remains slow and diplomatic. China has recently been linked to purchasing more US coal from West Virginia to reduce the trade deficit, which currently sits at $400 billion and is a major talking point between the two global powers.
The European economy is sluggish with stagnant GDP and wage growth. In March, the European Central Bank (ECB) lowered its 2019 forecasts. The German 10-year bond has fallen below zero, economic activity has decreased, and the United Kingdom’s anticipated Brexit remains very much unknown. European elections are due in May this year and will be of interest to markets. Additionally the Japanese economy remains a concern. Looking to further bolster its own economy, the U.S. has increased pressure around trade on Japan as well as Europe.
Overall earnings growth forecasts for U.S. companies softened in the first quarter. After robust earnings in 2018 when companies reaped the benefits of the 2017 tax changes, we believe this meets expectations. Wall Street sentiment remains mostly bullish, considering the market absorbs the risks from the horizon and volatility stabilizes.
The Federal Reserve provided further clarity in mid-March after keeping rates unchanged. During the March meeting, they outlined a plan for balance sheet normalization. Beginning in May, asset reduction from the balance sheet is expected to slow and be discontinued in September. The Federal Reserve also announced that no rate hikes were expected in 2019 and likely only one in 2020.
The U.S. consumer drives the U.S. economy, making up nearly 70% of GDP growth. Consumer sentiment remains strong as the tight labor market and wage growth continue to positively affect the consumer. GDP growth is estimated to be around 2.4% this year, higher than other developed countries.
Although housing data has been mixed, mortgage rates have been falling since the Federal Reserve took a more dovish approach to raising interest rates. Low lending rates keeps housing more affordable and positively impacts the consumer. Reasonable gasoline prices will also help stimulate the U.S. consumer, considering we are approaching the summer driving season. In summary, the following factors: low unemployment, interest rates, energy prices, and wage growth will optimize the U.S. consumer’s purchasing power and confidence.
In summary, we remain positive and optimistic on the U.S. equity markets based on the healthy economic data and the U.S. consumer. We believe the domestic markets are the best place for capital investment, considering a period of stagnant global growth, global politics, and low interest rates in the bond markets.
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