Market Monitor: March Update
Twice a month, we send clients this overview of the markets and roundup of key economic news stories. Similar to Altair Insight, it enables us to share our big-picture views while also highlighting select market returns and developments that we feel are important.
Headlines and Highlights
- Banner quarter for U.S. stocks: The Standard & Poor’s 500 Index turned in its best quarterly performance since the third quarter of 2009 and the best start to a year since 1998 with a 13.7 percent return from January through March. Small stocks fared even better with a 14.6 percent advance, their best first quarter since 1991, while international stocks also enjoyed double-digit gains and U.S. REITs (up 17.3 percent) led all asset classes. The Federal Reserve’s softened monetary policy and hopes for a trade-war deal with China have encouraged investors even as U.S. economic growth has moderated.
- Fed steps up dovish approach: The Federal Reserve doubled down on its dovish position at its late March meeting, projecting no interest-rate hikes this year and just one in 2020 and announcing it will stop shrinking its balance sheet in September. The Fed has reduced its balance sheet from $4.5 trillion to under $4 trillion in 18 months, a form of tightening that officials suggested could unduly weigh on the economy if continued beyond this fall. The central bank’s statements mark a sharp pivot from its more hawkish stance on tightening in December.
- Yield curve partially inverts but recession signs still muted: The 3-month vs. 10-year Treasury spread inverted temporarily for the first time since 2007, drawing wide attention as a possible signal of a future recession. An inversion is when short-term rates are higher than long-term rates, suggesting reduced confidence by bond investors in future economic growth. The inversion lasted less than 10 days, however, and another key part of the yield curve – the 2-year/10-year – remained positive as expectations for a 2019 recession remained low.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- We maintain our target-weight recommendations for both U.S. and non-U.S. stocks, which gained at a historically strong pace in the first quarter. The Fed’s about-face to a dovish position on monetary policy removes one of our key concerns coming into this year, and the increased possibility of a trade-war agreement with China should lift markets higher. In longer-term context, stocks’ recent rise has not been abnormal; the S&P 500 is up a modest 8.6 percent since the beginning of 2018 and remains 2 percent below its all-time high of last September.
- The U.S. economy is estimated to have grown by only 1-plus percent in the first quarter and corporate profits may be down from a year ago. But it is premature to view any cooling as worrisome, especially with the government shutdown having added pressure to what is a historically weak quarter. The latest monthly reading of the Leading Economic Index, an important barometer for growth prospects, was higher than the previous month.
- The short-lived inversion of the 3-month to 10-year parts of the yield curve last month was noteworthy but we do not believe it indicated a near-term recession. It ended after five days, short of the 10 days considered to be statistically meaningful. Even when inversions have been followed by recessions historically, stocks have continued to do well for lengthy periods before a recession occurs.
- The U.S.-China trade war continues to take a toll on some segments of the global economy, including exports, and remains an investment risk. While further negotiating delays are possible if not likely, we are optimistic about an agreement – President Trump wanting a “win” as he turns his attention to reelection and President Xi equally motivated by the slumping Chinese economy.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice