First Quarter 2019: Another Bounce Back
The “Teflon Market” showed weakness to end 2018, but bounced considerably to start the new year.
With an S&P 500 return of +13.6% and a synchronized MSCI Ex-US return of +10.45%, the first quarter of 2019 showed a sharper and more sustained bounce than even most optimists would have expected. What the indices lost in Q4 has been nearly erased.
Not since the back half of 2011 have investors seen a quarter of double-digit S&P 500 losses followed by one of double-digit gains. Since 2008, each of the four quarterly losses of more than 10% has been followed by a double-digit gain.
In our 2019 Outlook, we highlighted the following:
- Does Europe remain stable (Brexit/Italy)?
- Does the Fed prove its data dependence?
- Do earnings deliver?
- Is there trade resolution?
A full 3 months later, Britain’s still struggling for traction. In its March meeting, the Fed lowered its growth projections and reduced the projections for further rate increases. While there is no signed agreement between the US and China, experts say discussions have been encouraging and the tariffs have yet to escalate any further.
Arguably, the primary reasons for the Q1 rally lie in strong earnings. While there have been disappointments, overall earnings have remained ahead of analyst’s expectations.
As Ben Graham remarked nearly a century ago, “In the short run, the market is a voting machine, but in the long run it is a weighing machine.” News headlines and market participant behavior controlled the markets in the fourth quarter of 2018, while those simply “normalizing” contributed to the bounce-back to start 2019.
There will undoubtedly be further news headlines that “spook” the markets and there will be announcements that prompt quick favorable equity market responses. This is nearly always the case. (Note: the “Buying Opportunities Rarely Feel Good” piece in our last update.)
Dislocation and mispricing of assets are the foundation of opportunity. From Buffett to Evillard and beyond, it’s seizing upon such opportunities that has allowed some of Wall Street’s legends to separate themselves from their peers. The first quarter rewarded those who stayed the course during the fourth quarter (and those who selectively bought). Those who panicked saw a dramatically different outcome.
The Balance of 2019
Many investors, if asked to choose between a 10% return or “the market” for 2019 would have gladly taken a 10% return for the 2019 calendar year. With that in mind, we view the Q1 rally as both encouraging and as an opportunity to reassess and manage risk. We don’t believe in timing the markets but we do believe regularly monitoring and managing risk helps insulate portfolios from disproportionate exposure when downturns again surface.
Put simply, if earnings expectations are met for the balance of the year, it’s quite easily argued that equities are fairly-priced. Only a select few asset classes can be regarded as “cheap,” even given the backdrop of persistently low interest rates.
What is an investor to do? We believe there are a few basic tenets to managing the balance of the year:
- Avoid the temptation to overweight any high-conviction idea too heavily
- Avoid timing efforts; it requires you be right on both the sell and subsequent buy
- Don’t lose focus of the fact that equities have outperformed over the long-term and we believe are likely to continue to do so
- Avoid unnecessary risks in fixed income (don’t reach for yield, certainly not without carefully considering the risks)
We are firmly of the belief that investors (and our team on your behalf) must remain focused on your objectives. Few investors entering 2019 set out to outperform the S&P 500. Instead, most investors were looking for an absolute percentage return. We cannot lose sight of that target.
We expect the balance of 2019 to be a grind.
Most often, the late stage of a market cycle is a grind, followed by one final exuberant run before reversing course. Hindsight is always 20/20 but few investors ever wish they had been less disciplined in their approach.
Despite the Q1 move in the broad markets, we are neither looking to introduce additional risk into portfolios nor dramatically shift away from equity exposures. We believe that owning equities across multiple strategies (strategic, fundamental, technical, and alternative) provides a well-balanced approach from here.
As JP Morgan stated in its 2019 Outlook, “in any one year a diversified portfolio is never the best performer.” Conversely, it’s also never the worst performer! This environment is not one we deem conducive to big bets nor overly concentrated exposures.
As we emphasize in nearly every communication, discipline and risk management are invaluable. After years of passive strategies outperforming, we believe we have begun to see evidence that active management will be among 2019’s biggest value adds. Security selection and security avoidance figure to once again provide value as the Bull Market heads into its final stages.
Yield Curve Inversions… Why the Fuss?
Following the Federal Reserve’s most recent press conference, it would be hard to escape the flurry of discussions about the yield curve inverting.
So what is it and why should the average investor care?
First, a normal yield curve describes the US Treasury market more than 90% of the time. In a “normal” market the yield on a short-dated bond is less than that on a longer-dated bond. For example, at the end of Q1 of 2018 the 2-Year Treasury yielded 2.27% while a 10-year bond yielded 2.74%.
An inversion occurs when the yields of shorter-dated bonds exceeds that of longer maturities. On 3/22 the yield of a 10-year bond fell below that of the 1-month, 3-month, and 6-month maturities.
What’s the big deal?
Historically, the yield curve inverting has served as a warning light of sorts for economic slowdowns and ultimately recessions. Over the last four decades, only a couple of false alarms have been sounded (inversion without recession). The inversion in 2007 was far less heralded than the most recent one.
But therein lies the other side of the truth. From the moment of inversion, on average the market rallies another 15% in the subsequent 18 months. Inversion is very much a leading indicator and not a very good predictor of a recession’s timing.
We will continue to maintain a watchful eye on the yield curve and much, much more.
IRS Tax Tip: Don’t Be a Victim
All who know a CPA know that the next few weeks among the busiest for many. Unfortunately, these weeks are also among the busiest for scammers!
Taxpayers should be aware of several types of tax scams, but phone scams are particularly rampant during the March/April timeframe. Below are the basic principles of how these scams work:
- Scammers impersonate the IRS when calling, saying you owe the IRS taxes and could face arrest if you don’t pay
- Scammers many leave messages asking for a return call to clear up a tax matter or face arrest
- When you return the call, scammers often use threatening and hostile language (they are often well versed in scare tactics)
- The thief may demand that you pay “tax debts” via gift card, pre-paid cards, or wire transfer
While such scams are not new, they have grown in sophistication in recent years. Elderly and individuals dealing with dementia may be particularly vulnerable to these attacks.
So what can you do?
- Hang up immediately
- Report the call to the TIGTA using the IRS Impersonation Scam Reporting Form or by calling 800-366-4484
- Report the number to [email protected]; put “IRS Phone Scam” in the subject line
- Warn friends and loved ones you feel may be vulnerable
A few pointers about the IRS that may help:
- Call taxpayers demanding they make immediate payment using a specific payment method
- Generally, the IRS first mails a bill to the taxpayer before any phone communication
- The IRS will not threaten to have taxpayers arrested for failure to pay taxes
- Taxpayers are given the right to appeal/dispute any amount owed to the IRA
Don’t let the business of life allow yourself or someone you care about to be scammed. Take proper precautions and don’t ever hesitate to reach out to a professional for help.
Head Investment Partners
865-999-5332 | 844-389-2514
Did You Know?
- Across the street from our offices are several hundred students who are hungry
- The Pellissippi Pantry serves over 120 students a month (295 household members)
- The Pellissippi Pantry does not have a budget… It relies exclusively on donations through our Foundations of Food Drives like this one
- Donations may be made at our office throughout April
Reliability of Sources The articles and opinions expressed in this document were gathered from a variety of sources, but were reviewed by Head Investment Partners,LLC prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. In all cases, please contact your investment professional before making any investment choices.
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