On March 9th 2009, the stock market hit lows we hadn’t seen in over a decade due to a financial crisis resulting from a bubble in the housing market. Ten years later, domestic stocks, as measured by the S&P 500, had returned 17.5% on an annualized basis. International stocks, as measured by the MSCI EAFE, returned 11% annualized. This is no doubt a strong recovery following very turbulent markets.
The volatility in the fourth quarter of 2018 certainly harkened back to the 2009 market experience. But markets that trade quickly to the downside can just as quickly reverse course, as the first quarter of 2019 has shown. Markets have almost completely recovered from the tumultuous times we saw at the end of 2018. Domestic equities gained 13.65% in the quarter and international equities tacked on 10.15%. Even after this run, valuations, especially internationally, remain at or below historic levels. Not only are prices reasonable, the earnings outlook, though slower, still points to growth.
Earnings growth has been strong. In the S&P 500, 485 of the 500 companies (97%) reported earnings with aggregate year-over-year earnings growth of 12.0% and revenue growth of 6.2% during the fourth quarter of 2018. Considering this growth is taking place after the effects of the new tax bill have already boosted corporate earnings, there is certainly positive momentum on the side of economic output, despite growing concerns over slowing growth.
Domestically, the March job numbers came in weaker than expected and the Federal Reserve has made a point to be patient on rate changes. No rate increases are anticipated for the remainder of 2019 and the balance sheet reduction activities, otherwise known as Quantitative Tightening, are expected to slow. Since the Fed’s announcement, interest rates have moved lower across the board. Ten-year Treasury yields have fallen to 2.41 at quarter end.
In early March, the European Central Bank downgraded their projections for economic growth from 1.7% to 1.1%. This outlook led ECB officials to delay their first expected interest rate hike until after 2019, after previously announcing it would occur in the 3rd or 4th quarter of this year.
U.S and China trade negotiations continue to be a work-in-progress. While the original March 1st deadline has been extended by both parties, there’s no doubt the tension has been a damper on growth in the global economy, and especially for China. In late February, Beijing announced their own form of fiscal stimulus to shore up the slowdown the Chinese economy has experienced from trade tensions.
Brexit remains a mystery as Parliament is in disagreement over the greater uncertainties brought on by the deadline extension. A potential break-off from the European Union without an agreement in place is looking like a legitimate outcome, as the UK only has until April 12th to create a credible path forward on a potential deal.
It feels like headline news in the recent weeks has been all about slowing growth. While this might be a headwind in the coming years, it is important to remember the fantastic returns that were earned, even after all we’ve been through in the past decade. In 2011 Japan experienced a monumental 9.0 magnitude earthquake resulting in a near nuclear disaster, and the US Treasury lost its AAA credit rating. In 2015 Greece faced a massive debt crisis, threatening the safety of the entire Eurozone’s fiscal stability. Finally, 2017 also saw a year riddled with natural disasters ranging from forest fires to the $180 billion dollar cost realized by Hurricane Harvey. Additionally, Bitcoin and other crypto currencies threatened traditional asset classes with a boom in popularity followed by more than an 80% decline in value.
Geopolitical, corporate and natural disaster events are hard to predict, happen with regularity, and often cause short-term market reactions. Because of this fact, we recommend establishing long-term asset allocation targets. We also recommend making changes as your circumstances change, and not in response to any short-term external crisis.
We are here to answer your questions and make sure your current asset allocation is still appropriate for your circumstances. If it has been a while since you have visited with us, please do not hesitate to call or email and set up a meeting with your Hills Bank Trust and Wealth Management Officer.Some trust products and IRA contributions/balances are not a deposit, not FDIC insured by any federal government agency, not guaranteed by the bank and may go down in value.