First Quarter 2019: March Madness, or Just an Incredible Rebound?
After a turbulent fourth quarter, equity markets quietly rallied, largely erasing 2018 losses. The S&P 500, which plunged 13.5% in the fourth quarter, gained 13.6% and is once again within striking distance of all-time highs. While risk assets posted gains across the board, the hardest-hit segments of the market during the fourth quarter were the largest rebounders, with small-cap and growth stocks leading the rally. Emerging and developed international equity, which had sold off slightly less than the U.S. market, bounced back nicely as well, both posting approximately 10% returns for the first quarter. Real estate and high-yield junk bonds also rallied.
While it has been a fabulous start to the year, this turbulent turnaround is the latest of several gyrations since volatility returned to equity markets last year. After one of the longest low-volatility rallies on record, investors began fretting early in 2018 about a laundry list of possible triggers that could derail global growth. Investor concerns over corporate profits, tightening central banks, and trade wars have whipsawed market sentiment. Adding to the market drama has been the will-they won’t-they trade negotiations between the U.S. and China, which have recently been outdone by the will-they won’t-they Brexit negotiations playing out within the United Kingdom Parliament.
One source of investor strain was removed this quarter however, thanks to Federal Reserve Chairman Jerome Powell. In a press conference early in the year, Mr. Powell relayed that the Fed would be “patient” when raising rates going forward. In March, Mr. Powell signaled that the Fed was likely done raising rates for the year. These statements represent a far cry from the official Fed projections from 2018, which had been showing the possibility of two to three rate hikes in 2019 alone. Fixed income markets rallied as rates dropped across the yield curve. The 10-year U.S. Treasury yield fell to a 15-month low and the yield curve, depending on which short-term rate is used for measuring, has flirted with inversion.