1st Quarter 2019 Update

April 24, 2019

Key Points

• The US economy’s expansion continues on, and will likely become the longest on record this summer
• Equity markets did an about-face during the quarter, generating the largest quarterly advance since the third quarter of 2009
• The Federal Open Market Committee (FOMC) maintained its existing interest rate policy by keeping the federal funds rate target at a range of 2.25% to 2.50%
• Analysts are encouraged that there may be a positive resolution to the trade war with China relatively soon

The Global Economy

The US economy’s growth is expected to moderate somewhat in the first quarter. The Bureau of Economic Analysis reported its second estimate of fourth quarter 2018 gross domestic product (GDP) of 2.2%, lower than the prior estimate of 2.6%, and also lower than the third quarter’s 3.4% reading. The employment situation slowed in the latest month, but continued to deliver gains, with an average of approximately 186,000 jobs added each month. The unemployment rate declined to 3.8% from the prior month’s level of 4.0%. The Federal Open Market Committee (FOMC) maintained its existing interest rate policy by keeping the federal funds rate target at a range of 2.25% to 2.50%. Economists do not expect there to be any additional interest rate increases in 2019 as economic growth has eased.

The global economic environment has softened somewhat, with some economists saying the global expansion is now past its peak for this cycle. The reasons for the slowing are attributed to the cooling in world trade, capacity constraints and a tightening in monetary conditions. The European Central Bank has again loosened monetary policy in an effort to catalyze the slowing Eurozone economy, and the Brexit outcome will also impact the region’s outlook. China’s policymakers are attempting to transition the economy to one that can deliver more sustainable growth. At the same time, growth is cooling, and trade talks with the US could complicate matters. Economists and analysts are not in agreement as to whether the slowdown is the start of something more serious – perhaps leading to a recession – or merely temporary.

Below, we’ve highlighted broader market returns for the 1st quarter and year-to-date time periods:

Source: Thomson Reuters

Fixed Income

Fixed income securities’ prices and yields were impacted by concerns about slowing global economic growth during the quarter. The FOMC has acknowledged the slowdown and in a desire not to drive the US economy into a recession has backed off of further rate increases. This pause has resulted in a rally in bond prices, and a drop in yields. Some economists have pointed out that now that the FOMC has hit the pause button in its rate-hike program this cycle, it will be difficult to raise rates this year if the economy begins to heat up due to the repercussions such an unanticipated move would have on the financial markets. In a change from the previous quarter, most analysts, and the FOMC itself, expect there will not be any more rate increases in 2019.

The FOMC ended its recent March meeting by announcing that there would be no change in the federal funds rate target range to 2.25% to 2.50%. The decision to stand pat was widely expected, and was seemingly a commitment by the committee to take a more sustained pause. Many economists believe that rate increases for this cycle are now over as the FOMC does not want to derail the expansion. Analysts do not expect any rate increases for the remainder of 2019

Equities

Equity markets did an about-face during the quarter, generating the largest quarterly advance since the third quarter of 2009. Stocks’ first quarter performance almost completely recouped the losses of the prior quarter. Whereas the losses in the fourth quarter of 2018 were prompted by fears that the FOMC was being unnecessarily aggressive in raising rates, the gains of the first quarter can largely be attributed to the FOMC’s curtailing of its rate-increase program. Investors were heartened by the decision, which appears was made in time to avert a significant economic slowdown or recession. During the quarter several broad-based indexes rose more than 15%.

International stocks delivered generally positive results that fell somewhat short of the gains in US equities. Economic growth continues to lag that of the US, and the Eurozone is also trying to determine how the UK’s departure from the European Community (“Brexit”) will come to pass.

Summary

The US economy’s expansion continues on, and will likely become the longest on record this summer. The rate of growth likely won’t be able to keep pace with that of the middle quarters of 2018, and the recent deceleration in job growth indicates that future economic gains will be more muted. Importantly, however, the expansion is on track to continue, driven largely by the FOMC’s recognition of slowing conditions and resulting decision to curtail its rate-increase program. Mortgage rates have declined, helping the housing market, and stock prices have rebounded very sharply. Economists point to government spending also being a positive contributor to growth going forward. Inflation and wage growth have experienced an uptick, and economists believe that further acceleration could mean the expansion is nearing an end as the FOMC will need to act to avoid overheating.

Analysts are encouraged that there may be a positive resolution to the trade war with China relatively soon, if for no other reason than President Trump wants to avoid a stock market correction similar to the one that occurred in the fourth quarter when trade talks with China were not going so well. It appears an uncomplicated resolution to Brexit will not occur, and Brexit is now likely to be pushed off for at least several months. Most analysts are of the opinion that whatever the outcome, Brexit does not impose serious problems for the world economy.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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