After the market’s decline in the 4th quarter, the Fed ended the year with a more dovish tone and so far this year has continued with this lenient policy towards interest rates. This moderation, along with growing optimism on trade negotiations with China, has led to the best quarter for stocks since the 3rd quarter of 2009, repaying investors their 4th quarter losses. For the quarter, the S&P 500 soared 13.6%, with all eleven sectors participating in the upswing. Technology stocks led the surge with a jump of 19.9%. Small cap stocks fared even better than large caps with the Russell 2000 jumping 14.6%.
While the official US GDP numbers have not been released, 1st quarter growth seems to have slowed from its pace last year. While a slow first quarter has been the norm in recent years, this year’s growth was hampered by the government shutdown and bad weather.
Despite weak economic data emanating from Europe and China, international stocks, while not climbing as high as US stocks, moved smartly higher. Germany appears headed for a recession and Italy is already technically in one. Questions over the UK’s economic future remain as elected officials continue to squabble over an agreement to leave the EU. And in China, 4th quarter growth slipped to 6.4%. Nonetheless, developed market stocks rose 10.0% and emerging market stocks gained 9.9%.
Furthering its dovish tone, the Fed moved to a neutral policy stance during the quarter and announced an end to quantitative tightening by September. As a result, investors are no longer expecting a rate increase but are actually pricing in a rate cut. This pause on interest rate hikes, along with slowing global growth, created a good quarter for fixed income investments as well. The 10 year Treasury bond began the quarter yielding 2.68%, but by quarter’s end was yielding 2.41%. Overall, bonds in aggregate were up just under 3%, municipals gained a little over 3% and high yield bonds returned 7.3%.
Real return alternative strategies had an equally impressive quarter. Real estate rose 17.2% and commodities, led by a big jump in oil prices, gained 6.3%. During the quarter, because of tight supplies and less pessimism on global growth, oil climbed 33% to close with West Texas Crude priced at $60.17/barrel.
While our absolute return, or risk management, strategies provided downside protection during the 4th quarter’s sell-off, they trailed equity returns this quarter due to the market’s run-up but provided returns similar to the returns of short-term bonds.
With corporate growth slowing from last year’s torrential pace, stocks have become more expensive. The market’s growth has been fueled by optimism over the potential of a trade deal with China. As we have discussed in the past, there are many obstacles inhibiting the two sides from finding a solution to all the differences; however, there are incentives for both President Trump and China to resolve some of the issues and come to an agreement. Although we believe the US economy will continue to expand in 2019, we are cautious about the current exuberance.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Washington Trust Bank.