Clients opening their first quarter statements should see a notable increase in portfolio values over the previous year end. Short-term market movements can never be explained with precision, but we suspect the Fed’s abrupt policy reversal played a role in the rebound. As recently as December, Fed guidance pointed to two interest rate increases in 2019 and a continued reduction in the size of its balance sheet. By mid-March however, the forecast had been changed to zero rate increases and a halt in the drawdown of the Fed’s bond holdings. What could Fed Chairman Jerome Powell have gleaned in such a short span to warrant the U-turn? We decline to speculate, but as Greg Ip of the Wall Street Journal observed, “If real rates above 0.5% are a threat to both economic growth and 2% inflation, then that suggests the economy is fundamentally more fragile than in the past.”
Another development from the quarter was the temporary inversion of the yield curve. This state, where a three-month Treasury Bill yields more than a 10-year Treasury bond, has preceded each of the last seven recessions according to the National Bureau of Economic Research. While the reliability of the signal at this juncture is debatable, the bond market seems to be bracing for a weakening economy as well.
Now entering its second decade, the bull market could continue to run. If it does, we intend to participate via the selective ownership of equities. We believe this participation will continue to be somewhat muted because the mutual funds we use are not fully invested. Some stocks are so expensive in light of the above-mentioned economic risks that the managers would rather hold cash as a temporary substitute until prices become more reasonable. Mostly though, the funds are invested in cheap or fairly-priced, low-debt businesses that have the potential to deliver long-term growth.
We welcome your feedback.
Aaron Pettersen, CFA, CFP®