1st Quarter 2019 Review

Thankfully, the financial markets rebounded in a strong way from the dismal end to 2018. If we had to summarize the year-to-date market performance in a sentence, it would be this: markets rebounded strongly from the fourth quarter selloff but began slowing as global growth fears and recession risks increased.

As a reminder, why did stocks sell off so much in 4Q18? Concerns of slowing global growth, tighter monetary policies, and geopolitical uncertainty weighed on markets and produced a massive selloff. Investors panicked and the market became oversold. What was the correct investment strategy at the time? To buy.

Why did January come roaring back +8%? 1) The Federal Reserve said it would be patient with more interest rate increases (increasing rates is a form of monetary tightening used to slow down overheating economies and combat rising inflation), because inflation pressures were muted, 2) China and the White House agreed to a trade war truce until March 1st, and 3) investors realized the December sell-off was too deep, they came back into the market to buy stocks at discounted prices, which caused prices to rise.

What is inflation and why does everyone care so much? Inflation is a measure of how prices are changing. For example, a men’s dress shirt in 1900 cost $1, prices have risen significantly since then. The CPI (Consumer Price Index) and PCE (Personal Consumption Expenditures) price index are two measures of inflation that are roughly similar: the CPI is based on what households are buying; the PCE is based on what businesses are selling. The Federal Reserve is tasked with price stability and maximum employment. They currently define price stability as a 2% inflation target. In January, the latest inflation number fell to 1.9%, which is right on target, so the Fed determined they could be patient with more rate increases.

Why did February continue to roar +3.2%? For similar reasons as January, 1) the Fed meeting minutes were released and they confirmed the Fed’s commitment to “patience,” and 2) constructive Chinese-US trade talks continued and enough progress was made to avert the March 1st tariff increase.

Why was March a little choppy? Multiple reasons: 1) all the momentum from January is finally wearing off, 2) the excitement of the Fed slowing down interest rate hikes worried investors that there could actually be something wrong with the global economy, 3) nonfarm payroll data was much lower than expected, and 4) the US yield curve inverted, which has been a historical predictor of recessions.

What is the Nonfarm payroll data and why does everyone care so much? This is used as a broad gauge of employment health in the US – it covers 80% of workers that produce the entire GDP of the US. The main statistics are the number of additional jobs created in the previous month, and wage growth. The January report (released in February) was unusually positive, investors were curious to see if it would continue in February. The February number (released March 8th) was expected to be +200k jobs, it was actually +20k jobs. This further made investors nervous that economic growth could be weakening.

If the yield curve just inverted, doesn’t that mean the recession apocalypse is imminent? No, historically it has taken up to a few years for a recession to occur after the yield curve inverts. There is also a significant argument to be made that ‘this time is different’ because of the unprecedented monetary policies implemented after 2008. 

To conclude, though it’s been an exciting start to the year, we don’t want our investors worrying about every new piece of data coming out, (that is our job). But we do want our investors to know what these terms mean, and to not be nervous of the constant news headlines. In fact, the next time you are out with friends, feel free to impress them with your knowledge of the difference between CPI and PCE – it’s one of our favorite things to do at dinner parties.

The Means Team