Portfolio Strategy Review Q1 2019

by | Apr 10, 2019 | Portfolio Strategy

The Rebound from December

The business channels keep alarming us about a potential recession and the upside-down yield curve. The stock market ignored the pessimism rebounding from December’s intense selloff. Indeed, stock markets found comfort in the temporary magic of falling interest rates. It’s interesting and amusing to listen to economists and bond managers make short-term predictions about global economies and how they will impact the direction of interest rates.

The US economy kept moving forward with job gains, though growth slowed as the tax stimulus fades. The International Monetary Fund has cut its growth forecast twice since October. Uncertainty prevails, amid hope that the US-China trade talks will find common ground. The Administration looks like it’s ready to pick its next fight with Europe. Brexit’s combative politics makes US political dysfunction look like handholding and kumbaya around the campfire.

Low rates can prop up stock prices and justify higher valuations as we’ve seen in recent years. Unless it leads to a deflationary spiral that impacts corporate profits and economic growth. That’s not a prediction, just an observation based on historical evidence.

Asset Class Review

For Q1, assets rose. Double digit gains helped stem losses from December’s decline. REITs lead the way as rate declines bolstered these income generating assets. US stock markets were close behind followed by International markets. T-Rowe Price sees the Chinese stimulus as driving growth into emerging markets even as the IMF sees lower overall global growth.

The GSCI commodity index was driven mostly by oil’s 33% spike from January. Analysts attributed the rise to OPEC supply cuts and anticipation of the heavy summer driving season. Gold rose slightly. Copper, which is seen as a good predictor of economic activity, rose 11%.

The aggregate bond market rose. Interest rates increased into February and then declined sharply toward quarter end. Corporate bonds and lower credit quality outperformed the government sectors.

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