Linda S. Parenti, CFA
President & Chief Investment Strategist
The first quarter’s positive 13.7% total return was a mirror reversal of last year’s final quarter. Both fixed income and equities did well; and the risk trade was back on as growth outperformed value. Small and mid-cap stocks bested large cap, and domestic surpassed international. To date, April has continued the overall positive momentum, but there are shifts happening in market leadership.
In the early stages of an economic recovery, short-term interest rates are below long-term rates (= normal upward sloping yield curve). At the latter stages of an economic advance, growth rates slow (as a result of Federal Reserve increasing short term rates). Eventually, the difference between short yields and long yields becomes smaller (= flattening yield curve). If short term rates become higher than long term rates (= yield curve inversion) it is often, but not always, a sign that the economy will contract (= recession). Currently, the yield curve is nearly flat and inverted at several points, so increased attention to data trends in our nearly ten-year old economic expansion is warranted. Historically, stocks can continue to do well when the yield curve is flat. It is also important to note that our yield curve is being influenced by the extraordinarily low interest rates being offered on the sovereign debt of other countries. In addition, this often-mentioned signal is only one among numerous indicators. Other signs such as the unemployment rate and inflation are still at healthy levels.
In this environment, equity returns will likely be positive, but lower than average. We continue to expect stocks to outperform bonds as the year advances. With interest rates relatively range bound, fixed income returns are likely limited to yield alone.
Still, the recent price appreciation and expectations for lower earnings growth have left company valuations less attractive, and a pause may be due. In the near term, the upcoming first quarter earnings season and global trade issues will be influencing factors on the direction of the market. Continued progress with China, constructive developments with the European Union, and Congressional approval of our U.S. Canada Mexico agreement (USMCA) would be supportive to markets and justify improved earnings expectations for later quarters.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.