“Good investors gather information, put that information into current and historical context, then make sound decisions.”
The Russell 3000 Index, the NASDAQ Composite Index, and the S&P 500 Index approached or broke above their all-time highs in April. Once again, the large cap stocks are leading the advance. MidCap Indexes are back into their upper trading range and also poised for further advances. The SmallCap Indexes are having a little trouble breaking back into their upper ranges. To reiterate, January’s strong move was primarily a reversal of the sharp December decline. We are far more interested in the trends that have developed in the last three months. This provides us with more useful information on individual market sectors’ relative strength compared to the third quarter of 2018.
We are in the thick of first quarter corporate earnings reporting. Thus far most of the reports have been positive, but the few negative reports have not been received well, as evidenced by 3M’s report this morning. The stock dropped sharply, over -13%. Meanwhile, the broader S&P 500 Index held its ground. This is an example of why we prefer to use index sector funds in our portfolio allocation as opposed to individual stocks. It is impossible to avoid single-stock risk, just as it is impossible to dispute the risk management benefits provided when using diversified mutual funds.
That being said, there are times when an entire sector falls out of favor. We saw this last year when oil prices fell dramatically and impacted the entire energy sector. In the past couple of weeks this occurred with the health care and biotechnology sectors. This serves to emphasize the importance of not only utilizing mutual funds, but diversifying into baskets of mutual funds representing different asset classes. Overall portfolio performance is a product of all of its moving parts. However, as we experienced in the fourth quarter of 2018 and the first quarter of 2019, lowering tides lower all ships, and rising tides raise all ships. After the ‘tsunami’ in December, equity markets have resumed relative normality.
The high-speed trading in the fourth quarter appears to have been focused on U.S. equities, although international equities were pulled down in its wake. This is probably due to the increased liquidity afforded U.S. stocks versus their foreign cousins. When that selling pressure subsided, international equity markets as a group continued to tag along higher. This swing in momentum has proven to be quite beneficial for European equity markets, which had been in a protracted downtrend for all of 2018. Emerging market equities have followed suit by breaking long-term downtrends. This improved international equity environment is strongly suggestive of a global bull market.
Stabilization and strength of the U.S. Dollar as well as the Federal Reserves’ softening on further interest rate hikes have likewise benefited bond markets. All U.S. bond market indexes are higher for the year after turning in a stellar first quarter. As would be expected, the high yield corporate bond markets were far in the lead, as they took their cue from the equity market resurgence. However, investment grade corporate bond indexes, government bond indexes, and municipal bond indexes have also demonstrated excellent relative strength.
With all of this good news it would be natural to be a little suspicious. After all, this is pretty much where we were sitting last September. Last December, a number of ‘experts’ declared that we were entering the biggest bear market in history. They are remarkably quiet now. And once again, professional devil’s advocates are proclaiming that the ‘end is near’ on TV and the internet. Please don’t listen to them, and please don’t buy their books or whatever else they are selling. The truth is right in front of us. U.S. and global equity markets are poised for higher prices. U.S. and global bond markets are stabilized.
One of the most difficult tasks facing us now is to maintain the positive big picture and ignore the negative narratives. (And yes, I do realize the irony that you are reading this in a narrative.) We are entering one of the craziest, meanest, bizarre periods of history in the form of a presidential election cycle. Based on the last election, there will be no rules, even less courtesy, and lots of surprises. Financial markets will soldier on regardless.
Edward D. Foy, Manager, SELECTOR® Money Management.
Sources: Bloomberg.com, Marketwatch.com,