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Market Commentary

Global market rally continued in April;
US stocks off to best start in 32 years

May 2019

The strong start to the year, fueled largely by the Fed’s “pivot” on interest rate policy, continued in April for the global financial markets and was again led by the US. Despite the government shutdown and aftermath of the treacherous fourth quarter, the US economy surprised on the upside growing 3.2% on an annualized basis.

Much to the market’s delight (or relief), Q1 earnings season got off to a good start as well. Earnings estimates were continually lowered throughout the first quarter, even slightly negative for a period, which set the bar fairly low. This allowed for some positive surprises and helped with risk appetites for stocks driving markets higher for the month and off to their best start in 32 years according to CNBC (ending 4-30-19).   

Growth stocks led on the upside, as the tech-heavy Nasdaq jumped 4.7% in April and raised its gain for the year to 22%, hitting a new all-time high on April 23rd and 26th. The gains were broad based, as the large-cap S&P 500 rose 3.9%, hitting new all-times with Nasdaq, and ended April up 17.5% for the year. Additionally, the small-cap Russell 2000 gained 3.3% and the mid-cap S&P 400 jumped 3.9%. The Dow was the laggard adding 2.6%, as Boeing dragged on returns.

Foreign markets continued to participate in the rally posting solid gains in April as well. The benchmark MSCI EAFE index added 2.5% in April, while emerging markets rose 2%.

Bonds and interest rates moderated in April, with the Bloomberg Barclays Aggregate Bond index flat for the month and the benchmark 10-year T-note yield rose 10 basis points to 2.51%. Yield curve inversion concerns eased in April as the 10-year minus 3-month and 10-year minus 2-year T-notes rates moved back into positive territory again, albeit modestly. The belly of the curve remains inverted but is less of a concern.

Market QuickTakes...

  • With a strong April, US stocks are off to their best start in 32 years (ending 4-30-19 / CNBC)
  • US stocks set the pace in April, led by Nasdaq gaining 4.7%, followed by the S&P 500 posting a 3.9% rise; both hit new all-time highs near the end of the month
  • After regular reductions in estimates prior, Q1 corporate earnings have better than expected, with positive EPS and revenue surprises for the majority of companies reporting thus far (FactSet)
  • The US economy surprised on the upside for Q1 growing 3.2%
  • Foreign stocks rose solidly as well in April as the MSCI EAFE index gained 2.5%
  • The Fed held its third FOMC meeting of the year that started April 30 and ended May 1; as expected there was no change in rates. The Fed confirmed the labor market remains strong and the economy rose at a solid rate since the last meeting.
  • No interest rates hikes are expected the rest of the year as the Fed remains “patient” and interest rates moderated in April

The Outlook
The Fed’s “pivot” continued to pay dividends for stock investors in April and has been the largest catalyst for market’s recovery from the Q4 swoon (caused by the Fed). The market has largely discounted a US-China trade agreement (i.e. expects a positive outcome) and has also contributed to the strength in stocks. Despite the better than expected Q1 earnings season thus far, largely due to reduced estimates setting a low bar, the market’s strong returns have stretched valuations a bit as the major US market indexes trade near or at all-time highs. Forward earnings valuations are about average to the trailing 5-year average, according to FactSet. We’ve come a long way from the December lows, the S&P 500 has gained 25%+, and a consolidation of sorts and some volatility would be common before moving higher. Nonetheless, we remain cautiously optimistic for the balance of 2019 and continue to advise clients remain steadfast in their investment programs.   

May Update: Volatility Returns
May has gotten off to a rough start fueled largely by some increased uncertainty to the US-China trade negotiations, seemingly near the finish line. Not surprisingly, President Trump’s tweets prompted much of the market’s reaction. After a week of tumultuous trading across the globe and increased US tariffs from 10% to 25% on $200 billion of Chinese imports on Friday morning, the global markets ended on a positive note but still finished with loses of 2-3% across the board. China responded over the weekend by raising tariffs on $60 billion of US imports taking effect on June 1. This roiled the global markets on Monday, May 13th, on fears the trade war may indeed drag on and further weaken global economic growth. US markets slid 2.4-3.4% across the board, while foreign stocks dipped 1-1.5%.

However, stocks rebounded strongly today (May 14th) on comments by President Trump that recent developments were a "squabble" and the negotiations will continue. US stocks posted their best gains for a day in a month and recovered some of the losses from yesterday. The Dow rose 207 points, or 0.80%, while Nasdaq gained 1.1%.

Ultimately, we still see a positive outcome to the US-China trade negotiations, though it remains a frustratingly less than smooth process. While fundamentals remain intact, the longer it drags on the more negative the impact on the economy, earnings and return expectations. Further, if the impact is severe enough, the Fed may move from patient and steady toward easing like the market anticipates. At this juncture, we encourage investors, as noted above, to stay steadfast during the volatility, which remains in the near-term forecast. 

Check out the latest edition of our Quarterly Newsletter, the Wealth Asset Advisor Spring 2019. You can find past editions at the Resource Center/Free Investment Newsletter.


Your Nelson Securities Team