The first quarter of 2019 was the strongest quarter in ten years for the stock market. The volatility and downward pressure on stocks from the previous quarter was replaced with minimal fluctuation and stock prices experienced reconnection with earnings. Major economic indicators, such as job growth, manufacturing, and consumer spending, continued to grow through early April. Market worries eased after the Fed forecasted no more rate hikes for 2019, and both China and the U.S. are continuing to push for trade resolutions. The market responded favorably with each announcement of further progress in a trade deal with China. China’s econo-my continues to slow, which will further encourage them to reach a deal with the U.S. The DJIA realized a gain in the first quarter of 11.2%, and the S&P 500 realized a gain of 13.6%. Bonds, on aggregate, gained about 2%.
The U.S. economy continues to show signs of growth and expansion, but it may not be as robust as experienced in recent years. Many notable economists believe the U.S. economy is now in the late stage of the economic cycle, but this does not mean growth will disappear. In fact, history provides many examples of late cycle markets producing double-digit gains. Strong fundamentals support this view. The U.S. job market continues to impress with historically low unemployment. Also, the leading manufacturing index, ISM (Institute for Supply Management), recently reported 55.30% for March. Anything over 50% signals companies are expanding and not shrinking. The CPI (Consumer Price Index) rose slightly but well below inflation levels. Crude oil closed the quarter near $60. Global growth, which also expe-rienced correction in the 4th quarter, strongly rebounded to September lev-els. The global economy, as is the U.S. economy, is entering late cycle, with slower growth expected for the next 12-18 months.
The volatility of the 4th quarter subsided as the stock market strongly rebounded in all major indices. Solid earnings reports confirmed the irrationality experienced in the 4th quarter, and stock prices marched upward. There was some sector rotation as technology and energy companies lead with strong double digit gains. Healthcare, which finished 2018 as the strongest performing sector, took a breather during this quarter, and finished with 6% growth. Late stage business cycle momentum tends to favor industrial, consumer discretionary and technology. Equity sector allocation has been re-balanced to emphasize these areas.
There is wide expectation the trade deal with China will wrap up in the near future and will be favorable for both countries – especially for the U.S. China and the U.S. are each other’s largest trading partners. The forecasted pause in Fed rate hikes for the remainder of 2019, which has produced some of the lowest interest rates in 12 months, will likely continue to increase the flow of monies into the equities markets. The economy is expected to continue to expand, but at a less robust pace. Fundamental economic indicators are strong. Tax reform is still freeing up cash for companies to invest in R&D, expand business development projects, and pursue share buyback and dividend increase programs.