Weekly Market Update (April 8 – April 12, 2019)

By Kate Warne April 12, 2019

World markets ended the week nearly flat, digesting the balance of positive and negative news, none of which altered the current narrative. The IMF cut its 2019 global growth forecast to 3.3% from 3.5%, but noted that it expects growth to firm up in the second half of the year. The Brexit deadline was pushed out until October 31, while newly released Chinese March data (exports and bank lending) pointed to a rebound in economic activity. The week ended on a high note as markets were encouraged by solid bank earnings in the U.S. and a big acquisition in the energy space. As major indexes have rebounded near all-time highs, our outlook remains positive, but we expect higher volatility as well.

Our Quarterly Market Outlook
Investors celebrated an important milestone this past quarter, the 10-year anniversary of the bull market in stocks. With the S&P 500 just having recorded its strongest quarterly gain in 10 years and strongest first quarter since 1998, the conversation naturally transitions to what's next. The outlook remains positive, in our view, but we expect higher volatility as well. Sustained yet slower economic growth, in combination with continued growth in corporate earnings and still-low interest rates, are all elements supporting the bull market in stocks and suggest it can continue for a while longer. That said, we caution that the high returns the market delivered over the last 10 years are unlikely to be replicated as we advance in this cycle, reinforcing the importance of appropriate expectations and enhanced portfolio diversification.

Economic Outlook: Slowing but still-positive fundamentals
We view a recession this year as unlikely given optimistic consumers, healthy wage growth, and solid business investment. We expect growth to slow to near the 10-year average of 2.3%, with still-solid consumer spending and business investment providing positive support for earnings to rise, with some bumps along the way.

  • Consumers are well-positioned to sustain a solid pace of spending, in our opinion. An unemployment rate near a 50-year low and wages rising at the fastest pace of the 10-year cycle continue to fortify consumer balance sheets. Households are saving 7.5% of their incomes, above the 10-year average of 7.1%. Meanwhile, homeowner home equity (the difference between a home’s value and the mortgage debt owed) is at a record high $15.54 trillion.
  • While the pace of business investment slowed over the course of 2018 as the stimulus from the tax cuts faded, lower interest rates should help support more modest but solid business investment this year.

Equity Outlook: High bar to clear, but bull continues
Stocks have rebounded near all-time highs, but conditions have shifted since the last time they were at this level. Economic growth is slightly softer, Federal Reserve policy is easier, and interest rates are lower. However, market fundamentals remain reasonably sound. Strong first-quarter gains have raised the bar, which also raises the potential for short-term disappointments and higher volatility.

  • Corporate earnings should remain a pillar of support for the bull market, but the pace of growth is likely to slow this year. Overall earnings for 2019 are forecast to grow by low- to mid-single digits, helped by positive GDP and healthy revenue growth.
  • Expectations for no rate hikes this year and a trade agreement between the U.S. and China have largely been priced into stocks at this point.
  • We think there is still mileage left in this positive cycle, as the multiple warning lights of a stalling bull market are not yet flashing. However, expect more average-looking gains than the 18% average annual return over the past 10 years1.

Fixed Income Outlook: Interest rates low and on hold
We expect the Federal Reserve to keep short-term interest rates at current levels of 2.25% to 2.5% if inflation stays near the Fed’s 2% target and the U.S. unemployment rate remains near 50-year lows. If this continues, the Fed will have latitude to be patient and data-driven before acting on rates again.

  • We expect the gap between short- and long-term rates, known as the yield curve, to stay flat, signaling moderate economic growth ahead. With economic fundamentals positive and growing modestly, we don’t think a recession is imminent.
  • We recommend owning bonds of varying maturities, including high-yield bonds, to reduce risk associated with the return of normal volatility in the late stages of the economic cycle.

International Outlook: Expansionary policies improve prospects
We don’t believe a global recession is on the horizon since economic indicators have started to stabilize at low levels. However, they have not yet turned positive, and still-low valuations suggest investors remain overly cautious. While trade frictions and political uncertainty will likely cause ongoing volatility, we think international emerging- and developed-market equities are well-positioned to outperform.

  • Major central banks in the rest of the world have extended and expanded their monetary policies to combat faltering economic growth. In addition, higher political uncertainty has led many governments to spend more, and expansionary fiscal policies should increase growth prospects.
  • Although European data remain weak, China’s stimulus policies are starting to gain traction. China’s March Purchaser Managers' Index (PMI) showed a return to expansion after several months of mild contraction, and the impact of its tax cuts and other policies should produce modestly faster growth in the world’s second-largest economy. In addition, we expect a resolution of the U.S.-China trade dispute could be a catalyst for improving trade and growth globally.
  • The rising dollar has reduced returns to U.S. investors. We think the dollar is more likely to stay flat or decline as the growth outlook for the rest of the world improves.

Source: 1. Bloomberg, S&P 500 returns

Nela Richardson, PhD
Kate Warne, PhD, CFA
Craig Fehr, CFA
Investment Strategists

Angelo Kourkafas, CFA
Associate Analyst

Index Close Week YTD
Dow Jones Industrial Average 26,412 0.0% 13.2%
S&P 500 Index 2,907 0.5% 16.0%
NASDAQ 7,984 0.6%


MSCI EAFE 1,91.67 0.2% 11.4%
10-yr Treasury Yield 2.56% 0.06% -0.12%
Oil ($/bbl) $63.82 1.2% 40.5%
Bonds $108.27 -0.1% 2.4%

Source: Bloomberg, 04/12/19.  Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results.

The Week Ahead

U.S. markets will be closed for Good Friday this week. In this holiday-shortened week, the main focus will be first-quarter earnings along with several major economic releases, which include retail sales, the leading economic index, and flash PMIs, all reported on Thursday.

Important Information

The Weekly Market Update is published every Friday, after U.S. markets close.

The Dow Jones Indexes are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use.
All content of the Dow Jones Indexes © 2017 is proprietary to Dow Jones & Company, Inc.

Past performance does not guarantee future results.

Diversification does not guarantee a profit or protect against loss.

Investors should understand the risks involved of owning investments, including interest rate risk, credit risk and market risk. The value of investments fluctuates and investors can lose some or all of their principal.

Special risks are inherent to international investing, including those related to currency fluctuations and foreign political and economic events.

This information is approved for use with the public.
It is intended for informational purposes only.
It is believed to be reliable, but its accuracy and completeness are not guaranteed.

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