EQM Capital LLC 1Q 2019 Market Review – Attack of the Scary Market Monsters

Posted on Apr 1, 2019

The Dreaded Market V

One of the key risks of a hasty retreat in a market sell-off is that if trends reverse, you have locked in your losses and missed out on the subsequent recovery gains. Call it the attack of the dreaded “V-shaped” recovery!

In our Q4 Market Commentary entitled, “The ‘Bird Box’ Market we warned investors to keep their blindfolds on in order to avoid inflicting self-harm, and this turned out to be very good advice as depicted in the chart below.

Excuse my poor penmanship, but behold, the dreaded letter “V”.

After a brutal close to the year, the U.S. markets staged a “V-shaped” recovery, with most investors experiencing the best quarterly returns in a decade. The S&P 500 TR Index rose 13.65%, posting its strongest quarter since 1998.  The Dow jumped an impressive 11.81% despite being weighed down by industrials and the tech-blessed NASDAQ index climbed 16.81%.

A Hawkish Fed

But the caveat of course was that the market was just regaining what it lost in the fourth quarter of 2018. The market sold-off sharply last December when the Fed raised interest rates and rookie Chairman Powell “spooked” markets by announcing plans for two more hikes in 2019 despite rising evidence of a slowing global economy. The attack of an overly hawkish Fed left markets for dead.

The Fed either came to its senses or caved to political pressure, because it did a complete U-turn and is now committed to not raising rates at all. The Fed monster of old became this quarter’s market friend.

The “V-shaped” recovery bodes well for the rest of the year. In years when the S&P 500 has gained more than 10% in the first quarter since 1950, 9 times out of 10 it has notched higher, averaging an additional 5.8% according to LPL Financial and FactSet.

An Inverted Yield Curve

That’s not to say that all systems are go. There is still plenty to be worried about.  Most recently it was the attack of the dreaded Inverted Yield Curve. When 3-month bonds are paying higher than 10-year Treasuries, that’s a major signal of pessimism about the future. The yield curve just inverted for the first time since 2006.  This market monster is particularly scary because it usually portends a recession.  The last seven times the yield curve has inverted, excluding a 2-week period in 1998, the U.S. economy has entered a recession every single time within 15 months. In this scenario, stocks typically peak at the 6-month mark.

Many market forecasters, including former Fed Chair Janet Yellen, say it is different this time because the yield curve is so flat.  Don’t be scared! The Fed could act and lower interest rates to avert a recession or the White House could magically achieve a trade agreement with China, causing markets to rally and a spike in business confidence and investment to occur. There are economic levers to pull and fiscal options available to avert a recession.  We can slay this monster!

 The Consumer Remains “Beast”

The U.S. economy may be slowing, but it is still pretty monster strong. Unemployment rates remain low, wages have risen, and consumer spending remains robust. After all, consumer spending still accounts for the bulk of GDP and corporate earnings and the consumer remains “beast”. And now the consumer doesn’t have to fear the effect of rising interest rates on their home values.  It’s game on and back to Home Depot!

Yields are Back to Being Weak

As the Fed is no longer set on raising rates, yields are low and not going any higher and with 10-year Treasuries still paying only a meager 2.4%, stocks remain a relatively attractive investment Ironically, in a quarter delivering some of the best returns in years, investors pulled $5.6 billion out of stock funds in the first quarter of 2019, according to Bank of America, pouring $94.2 billion instead into fixed-income funds and cash proxies.

The Recession Monster?

Going into the rest of the year, should investors be scared of the Recession Monster?  Probably not this year.  As usual, we recommend clients stay focused on the long-term and let portfolio construction and asset allocation help keep the market’s monsters at bay.  But we will keep checking under the bed, just in case the market’s monsters do turn out to be real.


Q1 2019 Benchmark Performance

Target Risk 1Q 2019 1Yr 3Yr 5Yr
Morningstar Conservative 4.67 4.30 4.05 3.12
Morningstar Moderately Conservative 6.72 4.62 6.16 4.43
Morningstar Moderate 8.68 4.42 8.05 5.40
Morningstar Moderately Aggressive 10.71 4.06 10.02 6.33
Morningstar Aggressive 12.23 3.76 11.37 7.03
Benchmark Indices
Dow Jones Industrial Index TR 11.81 10.09 16.37 12.21
S&P 500 TR (U.S. Stocks) 13.65 9.50 13.51 10.91
Russell 2000 TR (U.S. Small Stocks) 14.58 2.05 12.92 7.05
NASDAQ Composite 16.81 10.63 17.97 14.29
Barclays Aggregate Bond TR (U.S. Bonds) 2.49 4.39 1.64 2.56
MSCI EAFE (International) 9.98 -3.71 7.27 2.33
MSCI EM (Emerging Markets) 9.91 -7.41 10.68 3.68
Source: Morningstar         as of 3/31/19



The opinions expressed above should not be construed as investment advice. This commentary is not tailored to specific investment objectives. Reliance on this information for the purpose of buying the securities to which this information relates may expose a person to significant risk. The information contained in this article is not intended to make any offer, inducement, invitation or commitment to purchase, subscribe to, provide or sell any securities, service or product or to provide any recommendations on which one should rely for financial, securities, investment or other advice or to take any decision. Readers are encouraged to seek individual advice from their personal, financial, legal and other advisers before making any investment or financial decisions or purchasing any financial, securities or investment related service or product. Information provided, whether charts or any other statements regarding market, real estate or other financial information, is obtained from sources, which we and our suppliers believe reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future performance.