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In a continuation of January’s stellar rebound, the markets continued to march higher in February. The S&P 500 now sits only slightly more than 5% from the all time high that was breached last September. Notably, it has only taken two months to recover about three quarter of the losses sustained during the last three months of 2018. As we have said before, the markets tend to “take the elevator down and the escalator up”, meaning the “up” moves are normally slow and steady. However, that has not been the case recently.

Deals & Doves

The markets in February were buoyed by the end of the government shutdown, the real specter of a US – China trade deal, continuing dovish commentary from the Federal Reserve and the possibility for a Chinese stimulus package. Economic growth in the US remains on solid footing as evidenced by the delayed release of fourth quarter GDP. The report showed that growth in the US had moderated from the 3.4% we saw in the third quarter of 2018 to a still respectable 2.6% in the fourth quarter. Another important indicator we tend to follow is the PMI (Purchasing Manager’s Index) which showed a decent rebound to 55.8 in the latest report. This should signify an ongoing rate of growth for the US economy of about 2%. Inflation in the US remains muted which has allowed the Federal Reserve to remain “dovish” (i.e.: less likely to raise interest rates). The Fed confirmed their “patient” outlook in the release of the minutes of the January meeting. This further helped equity prices recover and in fact pushed longer term bond yields lower.

Later Cycle Thinking

While the economic expansion in the US is aging, the economy remains strong enough to support higher valuations. However, some indications have been in favor of a market that takes a breather at these levels. From the recent market low in December to the end of February, the S&P 500 has returned more than 18%. That is a significant move in a short period of time. These types of moves are normally followed by a period of sideways action that allows the markets and its participants to “digest” everything. We’ll likely see that soon. (Click the link at the end of the commentary to learn more about how we think about market cycles.)

The Rest of the World

While European markets have also recovered nicely from their 2018 swoon, the momentum in those markets continues to weaken. With growth of only around 0.2%, the economy in Europe does not seem to have the same foundational growth that we are seeing in the US. This will hinder any further returns from their equity markets and bears watching. Meanwhile, the UK continues to struggle with Brexit. The uncertainty around their removal from the EU has weighed on business sentiment and until clarity ensues one can expect that to continue. Lastly, emerging markets have been challenged with weak economic activity, currency depreciation and some inflation.

Where do we stand at Shorepine Wealth Management?

Since breaking below the 2800 level in early October, The S&P 500 has now tried to break above 2800 four times. It has failed the prior three times. Sentiment around the markets have shown improvement in the level of “fear” that investors are feeling yet “optimism” has not yet fully taken root. One could actually say there is a significant level of skepticism prevalent in the markets today. Sometimes this is a good thing, other times it can be a harbinger of a reversal. The month of March may very well bring the most significant test of the rally of 2019. Meanwhile, the bond markets have seen downward pressure on yields as the dovish tones from all the central banks continue. One may expect further volatility here as more central banks try to figure out the best course of action moving forward. Because of the heightened volatility and slower growth we are likely to see ahead, we continue to look for companies with longer runways of growth to add to our portfolios. While we are satisfied that the recent correction/bear market did not shake us or our clients out of the markets, we also realize this market is now prone to some irrationality. Thus, we expect to take profits where appropriate and redeploy our client’s capital in areas that have yet to participate. Put another way, we will continue to rebalance your accounts where needed and likely will increase our vigilance in doing so.

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