by Connor Darrell CFA, Assistant Vice President – Head of Investments
Global equity markets extended their winning streak to four weeks and built on their strong start to 2019, bolstered by reports of further progress in the trade negotiations between the U.S. and China. Markets have climbed higher despite rising uncertainty surrounding the Brexit negotiations and the government shutdown, and there has been a meaningful positive shift in market sentiment over the past few weeks. The market reacted positively to earnings reports from several major S&P 500 constituents even despite results that were otherwise less-than-stellar; a sign that market prices were reflecting overly pessimistic expectations following December’s selloff.

Earnings Season Underway
The quarterly earnings season kicked off last week with approximately 10% of S&P 500 constituents reporting Q4 2018 results. According to FactSet Research, the blended earnings growth rate for those companies that have reported is 10.6%, the fifth straight quarter of double-digit earnings growth.  Analysts have been steadily reducing their estimates for earnings growth throughout the rest of the year, but the expectation is still for growth to remain positive. The earnings growth rate experienced during 2018 was fueled in large part by the year-over-year effects of corporate tax reform, which will no longer have an impact during 2019, so a decline from the mid-20 percent range experienced last year is to be expected.

by Connor Darrell CFA, Assistant Vice President – Head of Investments
Market’s climbed higher for the third consecutive week as investors shrugged off the lingering uncertainty related to the government shutdown, which has now stretched to the longest in U.S. history. Many economists agree that the shutdown will have an increasing impact on the economy over time, but the impact so far has been negligible (though the hundreds of thousands of federal workers who are no longer receiving paychecks would argue to the contrary). For now, the gridlock in Washington remains more of a distraction than a material concern for financial markets.

Bond yields ticked up slightly as the rotation to fixed income tapered off a bit due to the stabilization in equity markets. Minutes released from the Fed’s December meeting highlighted that recent modest inflation numbers and rising concern over downside risks in financial markets has given policymakers more flexibility to evaluate the current path of monetary tightening, suggesting that a pause in rate hikes may be upon us.

2017 & 2018: Unique in their Own Right
Towards the end of 2018, Deutsche Bank released a very interesting chart (see below) which showed the percentage of asset classes posting negative returns in each year since 1901. It will immediately jump out to readers that 2018 had the highest percentage of asset classes producing negative returns in more than 117 years. But perhaps less obvious in the chart is that 2017 had the lowest percentage. For many investors, the volatility in 2018 felt particularly jarring, and perhaps that is due at least in part to the fact that it represented such an extreme reversal from the 12 months prior. In any case, it is simply astounding that in a 118-year sample of returns history, the two most “extreme” years (as measured by the percentage of asset classes posting negative returns) happened back-to-back. Our takeaway is that the merits of diversification (of which there are many) have been less evident over the past two years because assets have tended to move in the same direction. We view this as somewhat of an anomaly, and caution investors from making significant portfolio adjustments based on experiences during two “outlier” years.