The U.S. stock market was up an astonishing 14.09% for the first quarter of 2019.  The market recovered from the worst quarterly performance since 2011 with the best quarterly performance in ten years. 

I think it is important to reiterate a fact I preach during market drops – that they are terrific buying opportunities.  Anyone who contributed to their 401(k) in the fourth quarter of 2018 bought amazingly strong and profitable companies at super discounted prices.  Stock prices in December may turn out to be prices that aren’t seen again for many of those stocks.

There were several catalysts for the recovery:

  • The drop in the fourth quarter last year was an over-reaction that created an over-sold market. Investors couldn’t resist the super discounted stock prices.
  • Fed continued its “dovish” outlook for interest rate hikes by confirming there will be no more hikes until economic data supports a hike. And the Fed will slow and discontinue the process of reducing the balance sheet. 
  • Optimism for a trade deal with China. Trade talks have progressed and the most recent news is that the major issues have been negotiated and agreed upon.

The market will certainly be boosted by a trade deal with the U.S. and China.  The level of the boost will be driven by how the good the deal is. But the boost is likely to be short term. 

Once the boost from a trade deal has passed the market will go back to be driven by the normal factors, namely corporate earnings.

Corporate earnings season for the first quarter has just begun.  So far the news is mostly good.  However, earnings growth is expected to be flat this quarter and next.  If that is the case, market performance should also be flat.  The earnings outlook for later this year is good.  And earnings could be surprisingly good this quarter, which would improve market performance.

The U.S. is economy is late in the business cycle.  We have full employment – there are more job openings than unemployed people.  The natural cycle means our economy will shrink, but there is zero evidence we are headed for a recession.  Thanks to cable TV there will always be small, loud group that thinks we always heading to hell in a hand basket.  Economic growth could just slow for a couple quarters than go back to a growth cycle.

The recent hoopla over the bond yield curve inverting was driven by that small, loud group.  An inverted yield curve occurs when long term bond yields drop below short term bond yields and turn the graph line representing the yield curve from a normal upwards curve to an inverted curve or frown.  An inverted yield curve has preceded a few recessions, but not every instance of an inverted yield curve has preceded a recession.  Currently, the yield curve has been affected by the Fed keeping interest rates at low rates and reducing the balance sheet.  We have full employment, it is impossible for a recession to occur when everyone is working.