“Good investors gather information, put that information into current and historical context, then make sound decisions.”
As expected, once equity markets got back on the ‘main road’ it was time for a rest stop. Frankly, we didn’t expect the exit to be accompanied by screeching brakes last Friday. Still fresh from the 4th quarter correction, it was easy to get caught up in major breakdown scenarios. (That’s our job, evaluating dynamic changes.) Turns out the driver was just a little too heavy on the brake pedal and too last-minute on the decision. So here we are, finally, at a comfortable technical level. The moving averages aren’t shattered. The trends aren’t battered. It’s just gotten a little bumpy (and volatile) as we pulled into the rest stop.
One of the realities of trading range markets, i.e. rest stops, is that markets become more susceptible to current news events. The Mueller Report release last Friday contributed to market volatility. This event had NOT been mentioned by any major economists’ as an event that might move markets. But in the absence of pertinent news, it became news, and subsequently was pushed into Friday’s basket, along with an interest rate inversion in debt markets. In spite of Friday’s drop, equity markets are respecting recent advances and holding ground.
International equity markets have been following suit. This is particularly interesting in European markets where the Brexit issue continues to move towards its reality, accompanied by a surprising amount of confrontation in the sponsoring country. Their equity markets have continued to recover from their tag-a-long decline of U.S. markets in the fourth quarter, and subsequent recovery in the first quarter of 2019. Emerging market equities made their break from a long-term downtrend early in January and have also paused into a trading range. So much of their moves have been tied to the China-U.S. trade talks for so long that one begins to wonder how much is not already marked into their price.
Fixed income markets have been one of the best surprises of the year. After all of the rhetoric about higher interest rates and falling bond prices, the Federal Reserve has become surprisingly mild, i.e. dovish, about further short-term interest hikes in the near future. This has been a boon to bond prices across the board. High quality to high yield, short term to long term, prices have been improving for fixed income investors. Currently, it appears that this stability will continue through 2019, which is good news for bond investors.
Performance numbers for equity markets year-to-date are rich, but keep in mind that a majority of that action is the rebound from the algo-trading/selling in the fourth quarter of 2018. Market volatility has started to quiet down with just a couple of exceptions during the past month. Major market indexes have, for the most part, reacquired their 50 and 150-day moving averages, harbingers of better prices in the near future. After six months of high drama it would be nice to settle back to fundamentals-driven equity moves, because the long-term fundamentals appear to be solid.
From a sector perspective, large cap equities are definitely in control. Mid cap and small cap equities just haven’t been able to sustain gains. The oil and gas sectors are still struggling from a price perspective, although the price of crude oil broke its downtrend and has been rising steadily. The financial sector got an early push with prospects of higher interest rates, but that rally has fizzled along with the interest rate forecast. This is good news for the real estate market, as well as the fixed income markets. The stick-in-the-mud has been the transportation sector, normally the ‘first robin of spring’ for the industrial sectors.
We remain constructive but cautious. We have no desire to hop back on the rollercoaster that was the 4th quarter of 2018 and the 1st quarter of 2019. There are more comfortable ‘resting places in the shade’ that we have identified and will be accessed should that scenario reappear. In the meantime, we continue to ride this long-term Bull Market.
Edward D. Foy, Manager, SELECTOR® Money Management.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.