March 31, 2019 Market Recap

Executive Summary

  • We suggested in our 4th quarter commentary that volatility would remain high in 2019 unless there was a material improvement in trade negotiations, the U.S. Federal Reserve became more accommodative, or global economic data improved. Two of these three risk factors materially improved in the 1st quarter which resulted in a strong rally in equities globally.
  • Furthermore, we wrote that the U.S. Federal Reserve needed to be more accommodative with not only their interest rate policy but also with their balance sheet unwind in order to ensure stability in the financial system. Essentially, this is what the Federal Reserve announced at their March FOMC meeting.
  • We cautioned investors not to be emotional about short term volatility in the 4th quarter and to stay fully invested to help achieve their long-term investment goals.
  • Primarily because of the factors above, the S&P 500 Index, a broad measure of U.S. Large Cap stocks, rose 13.65% in the 1st quarter which was its best quarterly return since 2009. From December 24, 2018 through March 29, 2019, the S&P 500 Index is up a remarkable 21.22%.


U.S. Federal Reserve

  • The U.S. Federal Reserve Chairman, Jerome Powell, kept the federal funds target range unchanged at 2.25-2.50% at the March FOMC meeting. Moreover, the Federal Reserve indicated no plans for interest rate hikes in 2019 and provided a more accommodative policy path over the next couple of years. The Federal Reserve plans to wind down its balance sheet normalization beginning in May 2019, with the program concluding at the end of September 2019.
  • The Federal Reserve now expects a slightly higher unemployment rate in the coming years. The unemployment rate is now projected to be 3.7% at year-end, up from 3.5% previously. The unemployment rate is projected to increase in 2020 and 2021.

Yield Curve

  • The inversion of the U.S. yield curve has been discussed at length recently. Specifically, the 3-month Treasury bill vs. 10-year Treasury bond yield curve turned negative for the first time since 2006 (see chart below). However, not all parts of the U.S. interest rate yield curve are inverted. As an example, the 2-year vs. 10-year spread remains positive at 14bps as of March 29, 2019. Notably, the 2-year vs. 10-year spread has historically been more highly regarded with respect to recession concerns.
  • According to J.P. Morgan Research, 7 out of the 8 U.S. yield curve inversions since 1960 were followed by a recession. Historically, a negative yield curve implies investors expect future short-term rates to be lower as the Federal Reserve eases policy in response to a potential recession.
  • However, contrary to the negative concerns that the financial media tends to portray with yield curve inversions, equity markets historically produced strong returns in the months and quarters following the inversion.
  • The NY Federal Reserve Bank’s Recession Probability Index stands at 24% for 2020. 


  • Trade discussions between the United States and China continue to progress in a positive direction. Generally, a trade resolution stands to benefit International Developed and Emerging Market equities the most. Year to date, International equities have posted strong returns (discussed below).

Economic Data, Valuations, and Portfolio Construction

  • Global economic data deteriorated in 2018 and remains weak in 2019. The J.P. Morgan Global Manufacturing Purchase Managers Index, which is a measure of economic health for the manufacturing and service sector, has steadily declined since early 2018 (see chart below). A slowdown in the Chinese and European economies along with trade concerns have been among the key drivers behind the global growth weakness.
  • The United States economy isn’t immune to the global growth slowdown. The Atlanta Fed GDPNow Forecast Model is 1.71% as of March 29, 2019. It is worth noting that the model reached a 2-year low of 0.17% on March 12, 2019.
  • According to Factset, the S&P 500 Index forward P/E ratio is 16.3x as of March 29, 2019 and is slightly below the 5-year average (16.4x), but above the 10-year average (14.7x).

International Equities

  • On the back of the Federal Reserve’s more accommodative stance, International Developed and Emerging Markets equities posted strong returns in the 1st quarter. The Shanghai Stock Exchange Composite Index (China) increased by 23.94% (in CNY terms), the Euro STOXX 50 Index (Europe) rose by 12.85% (in Euro terms), the MSCI Emerging Markets Index was up 10.26% (in USD terms), and the Nikkei 225 Index (Japan) increased by 6.81% (in Japanese Yen terms).
  • The Bloomberg Dollar Spot Index (BBDXY) increased by 0.21% in the 1st quarter. In our view, International equities remain attractive as they are trading at a substantial valuation discount compared to the U.S. stock market. According to, the iShares MSCI ACWI ex U.S. ETF (ACWX) currently has a P/E ratio of 13.07 based on 2019 analyst estimates. This is significantly lower than the SPDR S&P 500 ETF (SPY) which has a P/E ratio of 16.74x based on 2019 analyst estimates.

Fixed Income

  • U.S. interest rates declined across various maturities in the 1st quarter. Yields on 2-year, 10-year, and 30-year U.S. Treasury Bonds were 2.26%, 2.40%, and 2.81% respectively as of March 29, 2019.
  • The Bloomberg Barclays U.S. Aggregate Bond Index is up 2.94% as of the end of the 1st quarter. We continue to prefer owning higher quality U.S. bonds across our portfolios. In fact, over 70% of our fixed income bonds are rated AAA or AA.
  • Bonds have continued to provide their traditional diversification benefits and they are fulfilling their purpose as volatility dampeners well.

We look forward to your feedback on this revised market review and forward-looking commentary. Please reach out to us with any input as we continue to strive to provide our clients and our community relevant and useful insights.