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Stocks Start Strong

US stocks finished the quarter with one of its best starts in a decade. All 11 S&P 500 sectors ended the quarter higher for the first time since 2014, and growth companies saw particularly strong gains. The market has now recovered almost all of its fourth quarter losses from last year.

Our Perspective
Driving the rally was a sharp change in interest rate expectations at the Federal Reserve (Fed).

Investors believe the Fed is now more likely to be patient with any further interest rate increases, and they also suspect that the Fed is increasingly willing to let the economy run hot for a while.

Additionally, the market views progress on US-China trade tensions (even if in name only) as having dulled some of the more worrisome risks from late last year.

Decelerating global growth and slowing corporate profit growth are, on the other hand, still ongoing concerns facing the economy and financial markets.

We believe the economy remains in a later cycle stage and that a preference for higher quality stocks is still appropriate.

Interest Rates Tumble

Treasury yields fell significantly all across the curve last quarter, as almost everything from short- to long-dated fixed income saw strong buyer interest.

The US 10-Year Treasury Note, a key benchmark bond yield, fell 29 basis points over the quarter and finished last month trading at a yield of 2.41%.

Our Perspective
The divergence between the weakness in bond yields and the recovery in equity markets has become a key monitoring point.

Should bond yields continue to trend lower from here, we may become more concerned as it would signal softer growth and inflation versus expectations.

The yield curve, a key indicator of economic strain, has inverted on certain metrics (e.g., the 3-Month Bill and 10-Year Note inverted late last month). It should be noted, however, that the entire curve is not inverted and the back end has actually been steepening for the past 9 months.

Brexit Drama Next Act

The Brexit process has been an ongoing drama for several years now, and the saga took several more twists this month.

First, Prime Minister Theresa May has been operating on thin ice and already offered to resign if her Brexit deal is passed. The prospects for a snap PM election and/or a second Brexit referendum remain possible as well.

Lastly and most recently, Parliament has begun debating a host of alternative Plan B options if it fails to break the impasse on the initial May-negotiated deal.

Our Perspective
The UK’s path to Brexit remains uncertain and time is running out. The risk of a no-deal Brexit has become a very real (and sobering) possibility.

We still view the odds of the UK leaving the EU with no deal as low since the majority of politicians—for both the EU and UK—want to avoid a no-deal Brexit. Both the British and the Europeans have too much at stake.

Our View
Economic Cycle		The world should be viewed as remaining in a later cycle stage; global growth is slowing as the world’s major economies revert back to potential; while there is some evidence of improvement, it is difficult to see global growth significantly re-accelerating
Stock Market		Slowing global economic and earnings growth, offset by easier monetary policy expectations and US-China trade progress, still argue for a quality tilt in equities; broad equity market valuations are neither overly positive nor negative
Bond Market		We view the recent decline in bond yields as reflective of a change in policy expectations and in the shift from the Fed (and other key central banks), and not yet reflective of signaling something more ominous
Foreign Exchange		Softer US growth along with better growth overseas should lead to stronger demand for international assets, likely leading to a weaker dollar over time
Important Issues on the Radar		US-China Trade Tensions: political and economic realities on both sides should dictate that a trade deal will be made; we do not expect, however, a deal to result in a material change to the most important issues between the two sides (e.g., IP protection, China’s industrial policy, espionage, security, etc.) China Stimulus (Growth): China’s growth trajectory continues to be one of managed deceleration; ongoing government stimulus efforts are doing just enough to support growth (vs. targeting a meaningful reacceleration in growth)

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