by Brad M. Weafer, CFA Chief Investment Officer
Equity market behavior over recent months reinforces a valuable lesson to stick with long-term investing plans.
What a difference a quarter makes! The S&P 500 returned 13.65% in the first quarter. This was the best calendar quarter since the second quarter of 2009 and the best opening quarter of a year since 1998. These impressive results followed a bruising fourth quarter of 2018 that saw stocks fall nearly 20% from a high in September to a climactic low on Christmas Eve. The stunning recent reversal higher in the stock market has recouped all the losses inflicted, rallying 25% since the low to a new closing high on April 24th.
Short-term investors are prone to overreaction. During the fourth quarter, concerns over a slowing global economy, growing trade tensions with China, and a more restrictive Federal Reserve led to panic-like selling. However, improving domestic economic data, including manufacturing activity, housing sales, consumer confidence readings, and wage growth lowered concerns of a recession. In addition, the Federal Reserve did not increase interest rates during the first quarter and their public statements implied a less restrictive path than was originally feared. Adding to the improved sentiment, trade deliberations with Chinese officials appear to be making progress. Stocks soared as a result. How quickly fear can be replaced with exuberance!
There is an investment lesson to be learned from this schizophrenic action of the market. We constantly stress to clients; think long-term, don’t try and guess every turn of the market, and stick to a plan in order to reach long-range goals. This requires patience and an ability to not give in to the fear that falling stock prices engender. While the stock market is essentially flat over the last six months, had an investor panicked and sold stocks when things looked more bleak they would not have been much worse off. Michael Jordan put it succinctly, “The game has its ups and downs, but you can never lose focus of your individual goals.”
As previously mentioned, domestic economic data incrementally improved over recent months. Current consensus estimates call for 8% growth in S&P 500 earnings per share for 2019. Those estimates increased during the current first quarter earnings reporting season. While there are signs the U.S. economy is in the later stages of the cycle there is still scant evidence of an imminent recession that would put pressure on profits. For example, the Conference Board’s Leading Economic Index marked a new high in March (see figure below). This index is made up of a broad collection of economic weakness accelerates. We do not know if the new high in March marks a top. Historically, peaks in the index precede recessions by at least seven months and twelve months on average. While this is a short-time frame if the index has peaked, we do not see enough evidence to suggest undue pessimism on the stock market today, but some caution seems prudent. In the meantime, we continue to focus on finding excellent companies that will better weather the storm should the economic cycle turn. We expect portfolios made up of high-quality companies, with the proper mix of equity and fixed income securities in line with clients’ long-term goals, will reward investors over time.
Market Commentary Disclaimer: This publication is for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information contained herein is the opinion of Boston Financial Management and is subject to change at any time based upon unforeseen events or market conditions.