U.S. stocks ended the first quarter on a high note, with the S&P 500 index recording its best first quarter return since 1998 and best overall quarter since 2009, increasing 13.6% for the period. Every U.S. equity sector rose this quarter led by two very different and often less correlated sectors, technology and real estate. More defensive sectors like health care, which was the strongest performing sector in 2018, and utilities, lagged the market as investors rotated into more cyclical sectors. Energy had a strong rebound after being the worst performing sector in 2018 as oil prices rose 25% in 2019. The financial sector, while up 8.5%, was the second worst performing as the Fed has put further interest rate hikes on hold for 2019. In March, the yield curve inverted (short‐term rates higher than long‐term rates), making it harder for banks to be profitable when they borrow short and lend long. The broad‐based rally is encouraging for market internals, signaling a strong underlying market versus one when only a few stocks or sectors lead the way. Technology remains the largest component of the S&P 500 and has accounted for four percentage points of the market’s return or 30% of the returns year‐to‐date. On a market‐cap weighted basis, technology comprises over 20% of the S&P 500.
Thus far in 2019, our international counterparts rebounded but trailed the US markets. In Europe, Italy is struggling with a small recession, the UK battles over Brexit, and Germany is trying to fight off slowing manufacturing activity. The Euro Stoxx 50 Index, comprised of 50 stocks across 11 Eurozone countries, returned 12.2% for the first quarter. For the second consecutive month, Japan’s manufacturing index fell below 50 which is the threshold separating contraction from expansion. Japan’s GDP grew by 1.9% in 2018 but expectations are for slower 2019 growth. Uncertainty remains over Japan’s consumption tax rate hike from 8% to 10% in October this year, as the 2014 hike from 5% to 8% caused a sharp GDP contraction. The Nikkei 225, a price weighted index of 225 large cap Japanese stocks, returned 2.9% for the first quarter.
These returns across the globe may not have been what you expected if you were reading financial news headlines at the beginning of the year which were riddled with doom and gloom projections about a global growth slowdown. While there are legitimate concerns about the global economy, including trade wars and tariffs, Brexit, interest rates, and slowing economies in China and Europe, this quarter’s market returns were a healthy reminder that the stock market isn’t the economy. Remember 2018? The S&P 500 fell 6.5% while real US GDP grew 2.9%. The presence of risks to stocks is not a reason not to invest. Even in healthy markets one can find many reasons not to invest, but risk is why investing pays off over the long‐term. The best time to reassess your risk tolerance is when stocks are performing well and you feel good about your portfolio. If you lost sleep over the market correction at the end of 2018, now would be the time to adjust your portfolio. Please contact LVM any time you have questions about your portfolio.
Tyler W. Alvord, CFA