Investment Review and Outlook – April 2019
Markets and Economy
Wow, what a fast turnaround! After a bruising end to 2018 that saw all asset classes except Fixed Income post negative returns, global financial markets rebounded strongly over the three months ended March 31, 2019. Year-to-date, markets have made back most, if not all, of what they lost in 2018, with all asset class returns ranging from low single-digits to over twenty percent.
Three events in particular seemed to revive investor sentiment:
- a reversal in the Federal Reserve’s monetary policy from tightening to easing,
- increased optimism that U.S.-China trade talks will lead to an agreement, and
- continued signs that economies around the globe are stronger than many had concluded.
Despite this revival in sentiment and returns, an event in the bond market stole headlines in March. Investors started to fret over a U.S. yield curve “inversion” (when the long-term Treasury yield is less than the short-term Treasury yield), which many view as a signal of an impending economic recession. Here are some facts to consider in relation to inversions:
- As shown in the chart below, an inversion may be a “false positive”–there have been inversions without subsequent recessions.
- Even when the signal is accurate (only verifiable in hindsight), the timing to a recession’s onset is uncertain – anywhere from many months to nearly two years after the inversion.
Looking ahead, we remain cautious, but less worried than consensus thinking. Our take is that many investors and pundits seem overly worried that the U.S. economy is late cycle. As respected economist and Wall Street Journal contributor Alan Blinder recently reminded us, “expansions don’t die of old age; something kills them.” The U.S. economic expansion may be in the later innings, but this alone is not a catalyst for contraction. Fire needs a spark, and as we see it there is currently not much in sight to kill the near record length expansion.
Interestingly, some investors see better data out of China suggesting global growth could accelerate in the coming months. We tend to agree, especially now that interest rates have moved lower in the U.S. and central banks remain generally accommodative.
In summary, while the speed and magnitude of market swings over the past six months are surprising, the overall takeaway reaffirms a core tenet of our investment philosophy: investors should not focus on short-term sentiment or performance. Markets can be turbulent at times, often driven by abrupt changes in investor sentiment. The best performing asset in one period can suddenly become the worst. Instead, our goal is to invest for the long-term, managing portfolios that align with your risk tolerance and that seek to maximize return (after all investment costs and taxes) per unit of risk taken.