In the first quarter, the bull market celebrated its 10 year anniversary since bottoming out on March 6, 2009. Ten years later, the S&P 500 sits above 2,800, a rise of 2,133 points from the 667 crater seen during the financial crisis. While the 4th quarter of 2018 was tumultuous, it now appears that it may have been a good buying opportunity as stocks shrugged off slower growth concerns to come within around 3% of their all-time high. Bond investors were also rewarded in Q1 with a decline in interest rates boosting their prices. With both stocks and bonds performing well, investors that had the discipline to ride out the 4th quarter storm were rewarded handsomely for accepting portfolio risk.

U.S. Stock Market

Following the December sell-off, the S&P 500 returned 13.6% for the first quarter. This was the best quarterly performance in nearly 10 years with stocks seeing a dramatic and quick rebound from their lows. Additionally, all 11 sectors of the S&P 500 ended in positive territory with technology being the biggest winner, posting a 19.9% gain. Real estate and Industrials also fared well posting gains of 17.5% and 17.2%, respectively. Healthcare was the sector that struggled the most in Q1, however, it still squeezed out a solid 6.6% gain. Smaller stocks, as seen with the Russell 2000 index, outpaced larger S&P 500 stocks advancing 14.6% for the first 3 months of the year.

International Stock Markets

Developed international stocks also climbed for the quarter returning 10.1%. Emerging market stocks returned about the same at 10%. Similar to the U.S., foreign stocks received a lift from declining tensions in the United States’ trade war with China. The European Central Bank also gave a boost to stocks with the announcement that the bank will remain accommodative as long as necessary in an attempt to stifle lower growth expectations.
Despite seeing positive returns for the first quarter, international economies face numerous challenges. The Eurozone in particular continues to struggle with a GDP growth number that could dip below 1% this year. Prime Minister Theresa May continues to struggle to negotiate a Brexit deal with the rest of the E.U. while Italy’s economic numbers show the country is in recession. Slower growth in Europe was highlighted on March 22nd when Europe’s PMI (Purchasing Managers Index) fell to 51.3 in March from 51.9 in February. A measure of over 50 shows an increase in economic activity for manufacturing and service sectors.

Bond Prices and The Fed

The U.S. Aggregate Bond Index, which tracks an index of investment grade bonds, returned 2.9% for the quarter. This was its best quarterly performance in 3 years. Bond prices benefited from falling interest rates with the 10-year treasury closing with a 2.41% yield, down .27% for the quarter.
On January 4th, Fed Chairman Jerome Powell announced that they will be taking a flexible approach when it comes to raising rates. Later in the quarter, on March 20th, they announced targeting the federal funds rate at a range of 2.25% to 2.5% leaving this key rate unchanged. While The Fed previously was looking to continue to raise rates to what they felt would be “normal”, it is now expected that there won’t be any rate hikes for 2019. Moreover, investors, as per the fed funds futures market, believe the next move would actually be a rate cut. While stocks and bonds rallied on the news of lower rates, the economic GDP growth forecast was cut from 2.3% down to 2.1% suggesting that the U.S. economy is expected to slow down.
Towards the end of the quarter, the 3 month treasury yield rose above the yield of the 10-year treasury. Investors typically would expect to receive a higher yield for locking up their money for 10 years versus just 3 months. Additionally, when a yield curve inverts in this manner, it can be an indicator of an upcoming recession. Typically an inversion of the 2-year vs. the 10-year yield is used to define an inverted yield curve. This curve remains very flat but still slightly upward sloping. Additionally, as discussed in our last quarterly commentary, equity prices remain positive typically after the inversion of this yield curve with the average stock market peak occurring 19 months later.

Oil Prices & the U.S. Dollar

Brent crude oil prices advanced roughly 25% in the first quarter marking its largest quarterly rise since 2009. OPECs production cuts tightened the supply allowing oil prices to rise despite economic slowdowns. The energy sector as a whole outperformed the broad market, returning 16.2% for the quarter.
The U.S. dollar remains strong with the British Pound costing just around $1.30 and a Euro only $1.12 at the end of March. The U.S. Dollar Index rose slightly throughout the quarter by just over 1%. America’s stronger currency makes our exports more expensive to other countries and one of the contributing factors to our record $891 billion trade deficit seen in 2018.

Perspective Moving Forward

Investors that remained disciplined and invested were rewarded in the first quarter. With stocks near an all-time high and bonds performing well, many investors will have recouped most of their losses from the 4th quarter. While U.S. economic indicators still remain positive, weakened economies in the Eurozone can prove to be a drag for multinational companies who should expect a weaker European demand for their products and services. While the first quarter was great for investments, some of this appears due to a recovery and overreaction to the market selloff at the end of 2018. While a potential U.S./China trade deal and low interest rates will be supportive for asset price appreciation, difficulties overseas could be a detractor and create volatility throughout the year. At CRA Financial we remain committed to educating and coaching our clients through changes in the markets and in your personal life. Thank you for your continued trust and confidence in our firm.
Respectfully Submitted
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Francis C. Thomas CPA, PFS
Robert T. Martin, CFA, CFP®
Jeff Hilliard, CFP®, CRPC®
Gordon Shearer Jr., CFP®