This winter, US stocks recovered nearly all their cascading losses from the prior quarter that had left the major indices in or near bear market territory, defined as a 20% decline from previous highs. Reasons for the late-year volatility were several-fold, including concerns about an overly aggressive US Federal Reserve, stalling US-China trade negotiations, a prolonged government shutdown, tax loss selling, and a potential global slowdown. Subsequently, a more accommodative Federal Reserve, Chinese stimulus, and the resumption of trade talks provided all the salve needed for a significant recovery that left the S&P 500 index (‘SPY’ ETF Proxy*) up nearly +13.5% through March.

US stocks were not the only asset class to advance for the quarter; every major global asset class we track found its way higher with global stocks (‘EFA’ +10.3%), bonds (‘BNDX’ +3.0%), real estate (‘RWO’ +13.6%) and commodities (‘DBC’ +9.7%) all participating in the recovery. While this was a boon to diversified portfolios, it was somewhat unusual to see both stocks and bonds trading continually along the same path. They typically move opposite one another, and some analysts saw the coordinated trade as signaling conflicting views of future economic growth, with stocks bullish and bonds bearish.

An alternative view is that both markets were simply responding to a dramatic shift in US Federal Reserve policy. In early October of last year, Chairman Powell adopted an unexpectedly hawkish stance in the face of buoyant economic reports (CNBC, “Powell says we’re ‘a long way’ from neutral…,” 10/3/18). This initially sent markets lower, forcing the Fed to walk that view back in February as the yield curve started to invert with a starkly opposed dovish policy (BBC, “Slower US growth means no rate rise for 2019…” 3/20/19). The fact that markets recorded their best start to a new year since 1987 underscores this latter view. That said, it is a fact that global growth has moderated, leaving Germany teetering upon and Italy officially in recession. Sluggish growth has been blamed on Brexit uncertainty and the US tariff wars. Meanwhile, however, markets have signaled that the global economy remains in the sweet spot of slow but steady, non-inflationary growth.

Given this backdrop, first quarter earnings season will play an important role. Soft results are already anticipated, and so focus will lie on forecasts for the balance of the year. Pending that narrative, analysts currently predict a healthier second half (Factset, “Industry analysts project 8% increase…,” 4/5/19). Meanwhile, the portfolios have been incrementally reestablishing a fully invested status. Sometimes, as occurred this winter, there will be less upside participation as the models work to manage risk, but that is the occasional trade off when emphasizing capital preservation.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of March 31, 2019; ECA assumes no duty to update any information in this presentation for subsequent changes of any kind.