1st Quarter 2019 Economic & Market Review
Economy and the Federal Reserve
Global economic growth slowed, while U.S. economic growth continued at a slower, but relatively steady pace. U.S. GDP came in at a 2.2% annualized rate for Q42018 (information reported in Q12019). This reading was slightly below expectations for the quarter and similar to the 2.3% annualized rate for the same quarter last year. As reported last quarter, the economy is in the 9th year of its expansion, the third longest on record. The employment picture remained solid in Q12019 with the unemployment rate near a cyclical low of 3.8%; however, employment growth in February was a meager +20,000 after averaging a monthly gain of over +200,000 for the previous 12-months. The housing market weakened, as year-over-year home sales were flat (but declined in most months), while year-over-year home price increases slowed to a 3.5% growth rate. The Federal Reserve (the “Fed”), in early 2019, has put further rate hikes on hold, after raising rates four times in 2018.
After selling off into bear market territory in Q42018, global equities rallied strongly in the first quarter of 2019. Domestically, the S&P 500 Index, representing large-cap stocks, advanced 13.7% in Q12019 after declining 13.5% in Q42018. For the trailing 12-month period, the S&P 500 Index gained 9.5%. Large-cap stocks underperformed their small-cap counterparts for Q1 as the Russell 2000 Index rose by 14.6%; however, large cap stocks continued to outperform for the trailing year as small-caps gained only 2.0% over this period. Meanwhile, the Russell Midcap Index returned 16.5% for the quarter (6.5% for the trailing 12-months). In terms of style, growth outperformed value across all capitalization categories in Q12019 after significantly outperforming in 2018. For the quarter, all sectors advanced. Information Technology, Real Estate and Industrials were the strongest relative performers, returning 19.9%, 17.5% and 17.2%, respectively. The Health Care, Financials and Materials sectors were the poorest performers, posting returns of 6.6%, 8.6%% and 10.3% respectively. Emerging Markets rallied, returning 9.9% in Q1, but declining over the trailing 12-month period (-7.0%). The MSCI EAFE Index (representative of developed non-U.S. equity markets) also rallied in Q1, returning 10.2% (-3.1% for the trailing 12 months).
US interest rates remained low by historical standards. However, market concern over possible future Fed interest rate hikes along with the economic slowdown and a possible future recession was reflected in an inverted yield curve during the Q12019 (i.e. for certain maturities, short term yields were higher than longer term yields). Interest rates fell for short-term U.S. Treasury securities in Q12019, given the Fed’s intention to pause rate hikes in 2019. One-year Treasury yields fell by 23 basis points to 2.40%; however, the yield on the 10-year U.S. Treasury note fell by 28 basis points to 2.41%. The yield on the 3-month U.S. Treasury bill fell to 2.34% by quarter-end, down 8 basis points from the prior quarter-end. For the first quarter, the Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) increased 2.9% (4.5% for the trailing 12-months); the Bloomberg Barclays Long Credit Index was up 7.9% (4.6% for the trailing 12-months) and the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index returned 7.3% (5.9% for the trailing12 months).
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