March was a mixed bag for equity investors with the S&P 500 index continuing the gains of January and February. Small and mid-cap indexes did not follow the large cap index and pulled back. The Dow Jones Industrials Index (Dow) was just slightly positive for the month as was the MSCI EAFE. Commodities continued their 2019 rebound on dollar weakness. Bonds continue to perform well as yields fell due to the combination of poor economic news and dovish comments from The Fed.
U.S. & International Stock Index Returns
|Index March 2019 Year-to-Date|
|Dow Industrials 0.05% 11.15%|
|S&P 500 1.99% 13.07%|
|S&P 400 (Midcap) (0.85%) 14.02%|
|S&P 600 (Small Cap) (4.17%) 11.17%|
|MSCI World 1.16% 11.88%|
|MSCI EAFE 0.10% 9.04%|
|Bloomberg Agg. Bond 2.94%|
|CRB Commodity Index 8.22%|
|US Dollar Index (0.21%)|
All data as of 03/31/2019, 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.]
If one only looked at the S&P 500 it would seem that the market has simply continued its strong 2019 as the index gained another 1.99%. Looking a bit deeper, March performance wasn’t as strong as it appears on the surface. The MSCI EAFE, an international equity index, was just slightly positive for the month, as the small cap (S&P 600) and mid-cap (S&P 400) indices were both solidly negative.
Markets don’t move straight up or down and, as we noted last month, the start of 2019 has been incredibly strong. We found it more surprising that the S&P 500 continued higher than every other equity index we follow taking a break. While there may be a cause for concern in the future, one month does not make a trend. One not so great month is no reason to panic.
Just as the stock market decided to take a breather the bond market started to heat up. The yield on the 10-year Treasury bond started the month around 2.75% before falling off a cliff, ending the month at 2.44% and a monthly price return of just under 2%!!! That doesn’t sound like a lot until you do the math and realize yields dropped more than 11% in March.
More consolidation for the US Dollar Index as the trade dispute with China continues on and Brexit has somehow become a bigger mess than it was 31 days ago. So, to reiterate our thoughts, we are of the belief that the dollar is artificially stronger than it should be right now due to the threat of tariffs on both U.S. and Chinese goods to the global economy. A relief of these tensions would lead us to expect a move the US Dollar Index back to the 89-90 level, last seen in the first quarter of 2018.
Commodity strength has continued in March with the CRB Commodity Index again trending higher. Concerns about oil supply related to the situation in Venezuela along with the market’s belief that President Trump will be looking to increase sanctions on Iran in the coming months have kept prices strong. While we believe the long-term cost of oil should be in the $50-$60 per barrel, any time there are concerns about supply the price will rise as compensation for the risk.
April has historically been a good month for the equity markets according to The Stock Trader’s Almanac. Some have even called it the “strongest month” (Marketwatch). Of course, that’s no guarantee of positive performance. And after the strong first quarter this year we have no reason to believe that 2019 will be an anomaly. In fact, with the S&P 500 at 2834 and the Dow Industrials at 25,928, we are expecting both indices to make a run at their respective all-time highs from 2018 in the near future.
How the market reacts at that point, in our opinion, will give a big tell to where the markets are heading for the rest of the year. If we get there and blow right through the 2018 highs with conviction, we would expect it to be risk on for the foreseeable future. On the other hand, if the market reverses just below the highs or hits a new high and quickly reverses lower, we will be expecting the reverse lower to likely sustain itself.
All that said, we have some concerns …
Fundamentally the economic strength of 2018 is returning to a more baseline growth rate of around 2% (OECD) as the unemployment rate has stopped falling. There are a lot of jobs out there but not a lot of people to fill what is available. This will put pressure on wages as companies attempt to fill these jobs. Technically, small-cap, mid-cap companies, and the industrials have all recently stopped moving higher while below their 200 day moving averages (which is bearish). The bond market, as we noted above, has made a strong move to lower rates as the Governors of the Federal Reserve struggle with the direction of interest policy. This strong move is an indication that the bond market feels the stock market has it wrong right now.
One other interesting tidbit that many of those reading may have missed: in the past few years some interesting companies have either become public companies or have come back public after being take private in the past. There are some big name companies that people have become excited about, causing the initial pricing to come out on the high side. Many of these companies – more than 80% of them – become public while still losing money (Quartz). Last time this happened? 2000.
We remain positive on the stock market as we expect to see a test of the all-time highs. We do see signs of a fundamental change ahead but are not ready to make that call. Could be next week or next month or next year. With what we just laid out in the prior two paragraphs, one could start to think that a bull market and new all-time highs is irrational.
And that may be true. But as John Maynard Keyes said many years ago, “markets can remain irrational longer than you can stay solvent.”
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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
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