The return of investor “risk on” sentiment during the first three months of 2019 drove U.S. equity markets to their best quarterly gain in nearly 10 years and best start to a year since 1998. The S&P 500® Index finished the quarter up 13.65%, the Dow Jones was up 11.81% and NASDAQ was up 16.81%. Markets were propelled during the quarter by sustained optimism about a pause in the Fed rate hike cycle, while progress in the ongoing U.S./China trade saga also helped.
International equities also posted strong performance to start the year as investor risk appetite rebounded while the U.S. dollar treaded water during much of the quarter. The MSCI EAFE Index closed the most recent three-month period up 9.98% and the MSCI Emerging Markets Index finished up 9.91%.
Fixed income also participated in the broad upswing seen across global financial markets in the first quarter. The Bloomberg Barclays U.S. Aggregate Index ended the quarter up 2.94% and the Bloomberg Barclays U.S. High Yield — Corporate Index finished up 7.26%. 10-year U.S. Treasury yields fell during the quarter, however, leading to the first 3-month/10-year yield curve inversion since 2007. This is a key indicator to watch, as yield curve inversions are often — but not always — a harbinger of an economic recession.
Oil prices rose each month during the quarter, with WTI crude oil futures closing the month of March at approximately $60 per barrel — up over 32% since the beginning of the year. These higher oil prices reflect global supply that continues to tighten, driven by production cuts from OPEC and its allies (“OPEC+”) and continued U.S. sanctions on Venezuela and Iran.
Tariffs and trade policy continued to grab headlines during the first quarter as the 90-day ceasefire in the escalating trade war between the U.S. and China came to an official end. Unlike previous quarters, however, much of the news over the past three months had a more positive tone, with representatives from both nations expressing optimism that a broad trade agreement could be reached soon. In fact, as a result of substantial progress in trade negotiations, President Trump postponed a scheduled increase of U.S. tariffs on $200 billion worth of Chinese goods. A deal is not imminent at this point, however, as significant work remains and major sticking points — including U.S. intellectual property protection — must be resolved.
U.S. job growth was significantly above projections in both January and March, with February unexpectedly weak (yet still positive). January marked 100 consecutive months of jobs gains — more than twice as long as the previous record of 48 consecutive months that ended in June 1990. The unemployment rate fell slightly during the quarter to 3.8%, while wage growth hit a 10-year high of 3.4% year-over-year in February before falling slightly to close the quarter at 3.2%. Despite the monthly jobs report continuing to produce strong employment data, there is growing concern that the U.S. economy is beginning to sputter and that multiple factors could have negative near-term impacts — including slowing global growth, weakening corporate earnings and the fading effects of the Tax Cuts and Jobs Act.
At the end of February, Fed Chairman Powell testified before Congress that slowing global growth, muted inflationary pressures and a Fed Funds rate “in the range of neutral” lend support to the Fed’s patient, data-dependent approach to future interest rate adjustments. At the conclusion of its March meeting, the Fed announced that it would hold the Fed Funds rate steady and indicated that no additional hikes would be made in 2019. In addition, the Fed stated that the runoff of its balance sheet (aka “Quantitative Tightening”) would end by September of this year. These developments are a pronounced about-face from December when the Fed estimated that two rate hikes would be appropriate in 2019 and declared the balance sheet runoff to be “on auto pilot.” This updated view reflects reduced GDP growth expectations and an acknowledgement of recent weak economic data points. Of note, there have been 12 Fed rate hike cycles since 1954 — 75% of which have led to an economic recession.
Despite the feel-good nature of the recent market environment, most — if not all — of the good news has likely been priced in, and as such, we believe the likelihood of another correction has increased. As we’ve previously stated on multiple occasions, growing uncertainty across global financial markets has influenced our cautious outlook for the next 12 months. During times of uncertainty, it is important for investors to be appropriately diversified and remain committed to their long-term investing strategy. GuideStone strives to identify opportunities and risks in financial markets and is well-positioned to make opportunistic moves within the Funds in anticipation of, or in response to, specific market events or changing market conditions. As always, we do not recommend knee-jerk decision making.
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