“Good investors gather information, put that information into current and historical context, then make sound decisions.”
After being detoured for five months, it appears that equity markets are back on the main road. The detour took its toll in both time and energy. Most major market indexes are resetting back to the beginning of the third quarter in terms of price, which represents the main road. As is the case after a long detour, the passengers are hungry and the vehicles need to be refueled. For financial markets, this sort of ‘rest stop’ is normally represented by a trading range. There is a lot of economic data being released this week, which generally takes a few days to digest. It would be nice for the markets to take a break and stretch their legs.
The recovery rate for equities was surprisingly fast, as they have risen for nine consecutive weeks. That pace cannot continue indefinitely. The Russell 3000 Index is now almost three percent above its 50 and 150 day moving averages. A pullback to those levels would be both healthy and give those rising averages an opportunity to boost the index back to its late September highs. Should the Russell 3000 choose to challenge those highs immediately, the temptation to take profits could be overwhelming.
It appears that the only ‘casualty’ during the correction/detour was the oil and gas sector. Everything remotely associated with the oil and gas industry is still mired near their correction lows. Defensive industry sectors such as utilities, real estate, consumer staples, and healthcare were beneficiaries during the equity market declines, and have largely retained their gains. Offensive industry sectors, which were the hardest hit during the correction, attracted the most investment capital during the recovery. This is generally the case during corrections within the context of a bull market. Couple that fact with the impossibility of precisely timing equity markets and one can see why it’s so difficult to trade efficiently during a market correction, and why we rarely attempt it.
International equities have continued to tag along behind U.S. markets. European equities in particular had been experiencing lackluster results for most of 2018 even before the U.S. correction. When they pushed even lower during the U.S. correction they surrendered all of their 2017 gains as well. Their post-Christmas bounce has not been as rewarding, but the recovery from that deeply oversold condition may help them down the road. Emerging markets, on the other hand, are painting a much prettier picture. They have broken a long-term downtrend, recovered their 50 and 150 day moving averages, and are benefiting from the promising outlook for U.S.-China trade talks.
Bonds have actually provided the most pleasant surprises of all. For starters, they declined in the fourth quarter while equities were declining, rather than countering the move. Their declines were generally far less than those seen in the equity market, but they still pulled back. Then, in December, they started to push higher, and when equity markets bounced upward after Christmas, bond markets pushed even higher! In January and February investment grade corporate bonds, municipal bonds, and government bonds continued to move higher with equity prices and have broken out of a three-year trading range. What a wonderful surprise!
The road ahead still holds several questions, but right now there is not an orange barrel in sight. The benefit of continued positive developments in the trade/tariff talks is the strongest catalyst for U.S. and international equity markets. Any perceived difficulties in that arena will undoubtedly be blamed for future market volatility. The Wall is a non-event for domestic equities, but the Emergency Powers Announcement was credited for a very sharp daily rally. The news media’s assaults on the POTUS have become white noise, as has the circus in Congress. It comes back to the economic numbers being reported and the markets’ response to those reports. The bottom line is that we are in a much better position than before. And that’s a good thing.