1Q Market Review: Good Returns, but with a twist at the end

NEW YORK (AP) – The beginning of the year has been fabulous for investors, as long as you ignore all those worries that brood over a possible recession.

The S & P 500 index closed Friday its best quarter for nearly a decade, after surging 13.1% in the first quarter of 2019, and many other investments ranging from non-speculative bonds to Foreign stocks have also rebounded since their end of the month of 2018. Returns would have been even better without fears that the slowdown in global growth could weigh on the US economy.

The quarter's twists are just the latest for markets, which have gone from record highs to fear-driven sales for more than a year.

Large fluctuations have left equities and bonds at fair value, said Frances Donald, head of macroeconomic strategy at Manulife Asset Management. She is optimistic. Markets may continue to climb this year, but expect further fluctuations along the way. When she talks to big institutional investors, the atmosphere is usually full of nervousness, she says.

"The calls to the 2020 recession, whether right or wrong, have permeated all the minds of investors," she said.

The Fed has once again been one of the main drivers of the market and has become an antagonistic hero in the eyes of many investors.

At the close of last year, investors were worried that the Federal Reserve would raise interest rates too quickly and hinder the economy. The central bank raised short-term rates in December for the seventh time in two years, and the S & P 500 fell more than 19% from late September to December 24, almost defeating the longest market. bullish never registered for US stocks.

But on Jan. 4, Fed Chairman Jerome Powell said at a conference of economists that the central bank would be flexible in deciding when to raise rates. It was an immediate balm for investors, and the S & P 500 jumped 3.4% that day. It continued to climb until it reached a peak on March 21, the day after the Fed's announcement not to raise rates at all this year.

Meanwhile, companies published a new series of reports on windfall profits, helped by lower taxes. Earnings per share of the S & P 500 companies jumped 13% in the last three months of 2018 compared to the previous year, thanks to the significant gains made by companies in the energy sector. and communications.

But stock dynamics came to a halt last week when a surprisingly weak report on the European economy and other concerns raised worries about the global economy. Investors looked for bond security, which triggered the alarm on one of the most reliable recession indicators of the market.

Investors reduced the 10-year US Treasury yield relative to the three-month Treasury bill for the first time since shortly before the Great Recession. Such a "reverse yield curve" does not have a perfect balance sheet as a predictor of a recession, but it preceded each of the last seven years by a year or two.

Here is an overview of the movements that shaped the last quarter for investments:

– Stocks of funds skyrocketed

During the fourth quarter, the S & P 500 index fell 19.8% from its all-time high of 20 September. The promise of patience from the Fed has allowed the index to recover to 2.6% of the peak reached this quarter.

Technology stocks once again did most of the work, but the gains were widespread. Funds specializing in small stocks or large energy or real estate companies all posted gains. The SPDR S & P 500 ETF has performed better since the third quarter of 2009, as the economy pulled out of the Great Recession, with 13.6% for the quarter, including dividends.

Equity funds that focus on high-growth companies, such as technology, once again easily outperformed their counterparts looking for low-priced stocks, known as value funds. Value funds were partially lagging behind because they often have a lot of banks and other financial securities, which slowed down during the quarter, fearing lower interest rates and a slowdown in the value of money. economy do not hurt their profits.

– CLIMATE BOND FUNDS

Inflation is still low, the Fed is staying the course on interest rates and worry is growing about the strength of the economy. All of these factors contribute to higher bond prices and lower yields, and bond funds of all types realized gains in the quarter.

The iShares Core US Aggregate Bond ETF returned 2.9%, its best return in three years. It follows a premium bond index and benefited from the decline in the 10-year Treasury yield from 2.68% to 2.41% at the end of the last quarter.

– WHAT IS THE FUTURE?

Like the global economy, US corporate profits slow their growth. Analysts estimate that first-quarter profits probably decreased by almost 4% over the previous year, according to FactSet. If they are right, it would be the first decline in almost three years. This opens the door to potentially disappointing reports when the next quarter opens on April 1st.

Investors could therefore prepare for more turbulence in the next quarter. In addition to profit reports, they will gain more and more clues about the strength of the global economy and whether the US and China can advance their trade disputes to improve the global outlook.