| Index | 1st Quarter 2019 | Year-to-Date |
| S & P 500 (Large US Stocks) | 13.65% | 13.65% |
| Russell 2000 (Small US Stocks) | 14.58% | 14.58% |
| FTSE All World ex-US (International Stocks) | 10.26% | 10.26% |
| Barclays US Aggregate (Bonds) | 2.94% | 2.94% |
A Great Quarter for Stocks and Bonds
The first quarter of 2019 witnessed a dramatic comeback from the previous quarter. Stocks sold off at the end of last year culminating in the worst drop ever on Christmas Eve. The S & P 500 index fell 2.7% on that day and just barely avoided falling into bear market territory (normally a drop of 20%). Then in two days on December 26, the Dow jumped over 1000 points to record the biggest one-day gain ever. And stocks pretty much never looked back with major indexes largely recouping almost all of their losses from 2018. You can thank the Federal Reserve for this year’s rally – and pretty much blame them for last year’s dive. At the end of last year, investors feared that an overly aggressive Fed would pull the economy into a recession. The market priced in a recession in 2019 that doesn’t appear to be happening. In January the Fed signaled that it would hold rates steady for the rest of the year – a stunning reversal after the last of four rate hikes on December 19.
What changed? The economy is still strong: job gains are strong (despite a little hiccup in February), unemployment is low, inflation is near the Fed’s target of 2%. What has changed is the global economy, especially China and the Eurozone. Germany and Italy are in a recession. President Trump’s ongoing trade war with China drags on. And the longest US government shutdown didn’t help either.
With the Fed on hold and no recession in sight, investors cheered and stocks rose over 13%. Bonds did well too. The yield on the benchmark 10-year US Treasury note, which moves inversely to price, dropped to 2.388% on Monday, March 25 – a big drop from 2.684% at the end of 2018.
What To Do Now
The economy is slowing, but it’s not dead. We’re entering a wonderful “Goldilocks” environment – solid economy, strong labor market, low inflation, low-interest rates, accommodative Fed – all a very good environment for US stocks. Of course, dangers still lurk. To name a few: geopolitical tensions (always), trade negotiations with China, a slowing global economy, the divided government in Washington, inverted yield curve, flattening corporate profits. The list goes on and on. Stocks are not as cheap as they were at the end of 2018. However, with pessimism about corporate earnings quite pronounced, I’m hoping that stocks can continue to surprise and climb upwards, though modestly. Also, with the low inflation expectations that come with fears of a slowing global economy, now may be a good time to add a little bit of inflation protection through TIPs and other means. The labor market is tight, and wages may explode soon. As always, please let me know if you have any questions and if you’d like to discuss your portfolio in more detail.
Please let me know if you have any questions or concerns.
Sincerely,
Henry Gorecki, CFP®
HG Wealth Management LLC
10 S. Riverside Plaza, Suite 875
Chicago, IL 606
312-474-6496
henry@hgwealthmanagement.com
