As we entered 2019, most investors were cautious. We had just finished a challenging year. Stocks and bonds gyrated throughout the year, buffeted by macroeconomic events. In the final weeks of 2018, stocks fell sharply—giving up earlier gains—and teetered near a 20% loss from those previous highs, ending 2018 down 4.4%.
In 2019, those risks lingered. Interest rate fears continued to rise, casting doubt on whether economic growth could continue. The simmering trade dispute with China threatened to boil over into a prolonged trade war, and domestic political wrangling continued with the usual attacks and counterattacks.
Early in the first quarter some of those risks began to fade, at least temporarily. Talk of trade retaliation and tariffs gave way to more negotiations. Jerome Powell, Chair of the Federal Reserve, signaled that interest rates had risen enough, and no further rate increases were expected in 2019.
As the perceived level of risk dropped, markets rose. By the end of the quarter, the S&P 500 had recovered the losses of 2018 and then some. Bonds also rose with the prospect of continued low rates. The Barclays Aggregate Bond Index erased earlier losses.
Apparently, the dramatic moves were brought on by reactions to risk. The media often refers to down periods as “risk off” and rising markets as “risk on.” Our view of risk is a bit different. Risk isn’t always bad. We all encounter risks in investing and in our daily lives. Some level of risk is largely unavoidable. We build portfolios in anticipation of risk, not in response to it. As Columbia professor and famed investor Benjamin Graham once said, “Successful investing is about managing risk, not avoiding it.” This is best accomplished with a timeframe that is measured in decades not days.
Domestic Equities: The first quarter market movements again show that predicting short-term market movements is a near futile exercise. Just when rising interest rates and trade issues were certain to derail the 10-year run in equities, they didn’t. The S&P 500 bolted to a 13.7% gain. This was the best quarterly gain in almost 10 years. Smaller U.S. stocks, which are sometimes considered less exposed to trade issues, did even better. The Russell 2500 index shot up 15.8%.
International Equities: Foreign stocks struggled with issues of their own. European economies have been slower to recover than in the U.S. In addition, Europe has struggled with Britain’s halting negotiations for an exit from the European Union. Despite these issues, international equities also marched higher in the first quarter. The Developed Market Index increased 10% for the quarter. Emerging markets, despite the tariff issues, rose 9.9%.
Fixed-Income: The economy has obviously recovered strongly over the years since the Great Recession. Clearly, the massive stimulus provided by its unnaturally low interest rate policy had to be reversed. The trick would be to gradually raise rates. This is important because many areas of the economy like housing and consumer consumption are related to the level of rates.
When the Fed announced that instead of several interest rate increases in 2019, there likely would be none, bond investors breathed a sigh of relief and prices rose. The Barclays Aggregate, a measure of the total bond market, increased 2.9% for the quarter. This is quite a jump for the usually muted movement of bonds.
It is gratifying to see hard earned capital recover and grow. We sometimes get the question, “Are we out of the woods yet?” The answer is unfortunately, no. As stewards of capital, we understand we must protect hard-earned capital as well as grow it. The key is to balance these objectives, never letting one dominate the other—always seeking gains but aware of risks even when they are not yet evident. Our commitment to you is that we will be there during whatever the future brings.
Thank you for your confidence in us. Please let us know if you need anything or just want to talk. We are here to help.