Stock markets both at home and abroad continued their upward march in April with strong returns for all the indices we follow. Bonds and commodities – very strong all year – paused, moving very slightly higher. The US Dollar, on the other hand, was very strong this month, posting its best monthly returns in some time.
U.S. & International Stock Index Returns
|Index April 2019 Year-to-Date|
|Dow Industrials 2.85% 14.00%|
|S&P 500 4.44% 17.51%|
|S&P 400 (Midcap) 4.44% 18.50%|
|S&P 600 (Small Cap) 4.23% 15.40%|
|MSCI World 3.77% 15.65%|
|MSCI EAFE 2.68% 11.72%|
|Bloomberg Agg. Bond 2.97%|
|CRB Commodity Index 8.51%|
|US Dollar Index 1.24%|
All data as of 04/30/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Since the start of 2019 we have written the same thing when discussing the equity markets – this month was another good one for equity investors. April was strong across all three US-based indices and both if the international indexes we follow. If the year ended today most every stock investor would likely be happy with their results. New all-time highs were printed for the S&P 500 as well as the technology-heavy NASDAQ.
While that is all good, for the rally to continue (and we think that is a very real possibility) other areas of the market need to join the party. Specifically, small and mid-sized companies (Russell 2000, S&P 400 and S&P 600) have lagged behind larger stocks. This suggests that market leadership is coming from a smaller number of stocks and sectors. This doesn’t mean the rally is coming to an end. On the contrary, we know, historically speaking, there are many market rallies that have occured on the back of just a handful of big winners (with 1999 being the best example). But when the rally ends – and they always end – without broader underlying strength the aftermath can be quite ugly (think 2000-2002).
The 10-year Treasury ended April just slightly higher than it started the month. The mid-month move higher didn’t stick and the downtrend in yield remains in place.
After a long period of consolidation, the US Dollar looked to be breaking out to higher levels at the end of April. Yet even with the strong 1.45% monthly increase for the index, the breakout failed, closing back within the trading range. In May we should see if this was a fake-out breakout or just a first attempt at greater dollar strength.
After a strong first quarter the CRB Commodities index flattened out, increasing a slight 0.19% for the month. Concerns about oil supply continue after President Trump looked to tighten up the sanctions on Iran. Combined with the continuing unrest in Venezuela, we believe there’s good reason for markets to have doubts about the global oil supply. Without a resolution to either of these situations, or a spike in production from OPEC, Russia, or the United States, oil prices should remain persistently higher than our $50-$60 target.
Stock market “wisdom” often comes in nifty little phrases. Here are three examples:
“Rule #1: Don’t lose money.”
“Investing should be like watching paint dry.”
“Sell in May and go away, and come back on St. Leger’s Day”
The first two axioms just make sense. It is impossible to compound negative numbers so not losing money (or limiting losses) should always be front and center. Regarding number two, as long-term investors Magellan Financial believes you should get your entertainment someplace other than the stock market. Trading can be fun, but it has no place in a serious investment portfolio. The idea of selling your portfolio on April 30 and moving to cash is different. While the first two are essentially saying good investing is conservative investing, making a decisive move every six months to be in or out of the stock market is a bold move. That would be the opposite of a conservative strategy. How has it stood the test of time?
Here’s what we know: Between 1950 and 2016 all the gains in the Dow Jones Industrial Average (DJIA) had come between the months of November and April. If you only held the index between May 1 and Halloween you would have lost money. This does not mean that every year the DJIA had a negative return over this time period, just that in aggregate the market was down. Nor does it mean you made money every year between November 1 and April 30.
Simply stated, it does appear that seasonality is a thing over the long term, but it shouldn’t be the sole factor one’s investment decision is based upon. Maybe A factor but not THE factor. Which brings us to May 1, 2019.
As noted earlier the S&P 500 and NASDAQ have both reached all-time highs while small and mid-cap indexes have produced solid 2019 gains but have yet to regain all the losses from the fourth quarter of 2018. A notable disparity, for sure, but strong performance across multiple asset classes. At first glance such a divergence suggests something could be amiss.
Taking a deeper dive into the charts with some basic technical analysis we see no reason for panic or a seasonal sell. Listening to corporate forecasts some companies have issues that are unique to their situation, but we hear no fear of general economic problems on the horizon. Analyst earnings expectations are strong for the back half of 2019. Forecasts of steady economic growth appear realistic. This all looks and sounds very normal to us.
Of course, all that could change. Every good chart eventually looks bad; company forecasts don’t always come to fruition; earnings forecasts are no guarantee and often overly optimistic; economic growth eventually slows. But none of this has anything to do with seasonality.
Last month we were stock market positive, expecting a test of the all-time highs. We noted that we see a fundamental change in the future when one’s strategy and expectations will need to change. May 1, 2019 is not that time however. We remain positive on the stock market.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com