Quarterly Commentary – Q1 2019

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Equity markets bounced back from a tumultuous end to 2018 with one of the strongest quarters in recent memory. Remarkably, the upward momentum in equities was established despite further weakening of the economic backdrop, a lack of real progress in US/China trade negotiations, and the longest government shutdown in US history. So what changed? For one thing, the market likely overshot to the downside when it teetered on the edge of bear market territory back in December, but markets also received a shot of adrenaline from the Federal Reserve, which completely reversed course on its plans for monetary policy normalization.

The market rally during the first quarter has helped to illuminate just how fixated the market has become on the Federal Reserve. The roots of that fixation likely trace themselves all the way back to the financial crisis, when interest rates were pulled down to zero and the great policy experiment known as “Quantitative Easing” began. For ten years now, the market has become accustomed to the artificially high levels of liquidity and easy access to capital that these policies have fostered, and it is becoming apparent that it will take time for markets to be weaned off of that support. All of this has put Fed Chairman Jerome Powell in an unenviable position, where every public appearance he makes has the potential to invoke a meaningful response from markets.


Performance in the bond market was also strong to start the year, as a downward shift in inflation expectations combined with the reversal in rhetoric from the Fed to push yields to their lowest levels since 2017. However, bond yields flashed a bearish signal to markets during the last few weeks of the quarter as the yield difference between the 3-month T-Bill and the 10-year Treasury Note inverted (the yield on the longer dated 10-year note moved below that of the 3-month T-Bill). The inversion has prompted many to point out the historical relationship between yield curve inversions and economic recession, but we believe this is overblown.

The yield offered on US Government bonds is largely dependent upon expectations for economic growth and inflation, both of which have moved lower over the past 6 months.  However, at this point in time the US economy appears to be slowing rather than stalling. Expectations for economic growth remain around 2%, which could still provide a stable environment for investors to generate modest returns. In a low inflationary world, modest returns should still be enough to keep investors on track for their long-term goals.


Much of our review of the first quarter has been focused on the Federal Reserve and monetary policy, which remains a key area of focus for markets. But as the calendar rolls over into spring, markets may shift their focus to Q1 earnings, which are expected to be quite a bit lower than in 2018. The extent to which earnings exceed or miss expectations could be a key driver of market performance in Q2.

Furthermore, while President Trump has signaled that he is generally pleased with the progress that has been made with respect to trade negotiations with China, little tangible evidence of an impending deal has emerged. Recent data from Europe has highlighted the impact that the slowdown in global trade has had on the world economy, and this has been a source of unease for global investors. In our view, an eventual deal with China will be important to the extension of this bull market, as it would help to alleviate the concerns permeating through markets regarding the growth rate of the global economy. And it is these concerns that are at the core of the market’s anxiety over the future of Fed policy.

VIDEO: Q1 2019 Market Commentary – Connor Darrell CFA, Head of Investments, shares Valley National Financial Advisors’ review of the first quarter in 2019. WATCH NOW

The Numbers & “Heat Map”

Sources: Index Returns: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends. Interest Rates: Federal Reserve, Freddie Mac

The health of the US economy is a key driver of long-term returns in the stock market. Below, we grade 5 key economic conditions that we believe are of particular importance to investors.



Our consumer spending grade remains an A. Surveys of US consumers continue to indicate that the consumer is in a strong position, and a recent bounce back in existing home sales suggests that households are still willing to make large purchases, which bodes well for the economy and for markets.



(Upgraded from C-) Following its March meeting, the Federal Reserve signaled to markets that it may not hike interest rates during 2019, and plans to halt its balance sheet reductions. The Fed’s future actions will remain data dependent, but the contractionary policies that have dominated the last two years appear to be on pause.



(Downgraded from B+) Corporate earnings remain strong, but we anticipate earnings growth will taper off in 2019. According to Facset, the expected earnings growth rate for S&P 500 companies during 2019 is around 4%. This is below the long-term average for the current cycle.



The US economy added just 20,000 new jobs in February, which was far less than expected. This was the weakest number since 2017, but job gains from both December and January were revised upwards. Despite the weak report, the labor market remains one of the strongest components of the economic backdrop at this time.



Inflation is often a sign of “tightening” in the economy, and can be a signal that growth is peaking. The inflation rate remains benign at this time, but we see the potential for an increase moving forward. This metric deserves our attention.




The above ratings assume no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 5. These risks deserve our ongoing attention.

The “Heat Map” is a subjective analysis based upon metrics that VNFA’s investment committee believes are important to financial markets and the economy. The “Heat Map” is designed for informational purposes only and is not intended for use as a basis for investment decisions.

The Markets This Week

by Connor Darrell CFA, Assistant Vice President – Head of Investments
U.S. equities (as measured by the S&P 500) posted another week of gains and closed out the strongest quarter since 2009 on a positive note. Investor sentiment toward the end of the week appeared to be bolstered by stronger than expected new home sales, which helped to calm fears about a weakening housing sector. The bounce back in the housing market may have been driven by the significant decrease in bond yields to start the year, which have helped push mortgage rates down well below their 2018 highs.

The sharp drop in bond yields over the course of Q1 has been largely driven by softening global economic growth and a shift in rhetoric from the Federal Reserve, which is no longer anticipating any more rate hikes during 2019. However, at some point the market’s primary focus will shift away from Fed Policy and Q1 earnings season will be one potential alternative. As companies begin reporting Q1 earnings, which are expected to be quite a bit weaker than in recent quarters, the market will need to grapple with whether the recent rally can be sustained despite weaker corporate profits. The extent to which corporate earnings exceed or miss these lower expectations may go a long way toward guiding market performance over the next few months.

Q1 Market Commentary Now Available
Our market recap for the first quarter of 2019 is now available on our website at valleynationalgroup.com/Q12019

“Your Financial Choices”

The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®.

This week, Laurie will discuss: “Special Elections and Situations in PA Inheritance Tax Filings” with her guest Attorney Charles Stopp, from the law firm of Steckel and Stopp.

Laurie and Attorney Stopp will take your calls on this or other topics at 610-758-8810 during the live show, or via yourfinancialchoices.com.

Recordings of past shows are available to listen or download  at both yourfinancialchoices.com and wdiy.org.