2019 Q1 Market Commentary
The S&P 500 rose by 13.1% while the Dow increased 11.2% and the NASDAQ climbed higher by 16.5%. Now, raise your hand if you saw that coming. Just ninety days ago we were discussing a government shutdown, rising interest rates, tariffs, an impending recession and more. This news pressured the markets into one of the worst quarters that we have seen in years. As we close this quarter out, the government is back up and running, we seem to be closing in on a trade deal with China, the interest rate on the 10-year treasury is at the lowest rate in more than a year and as a result the stock market posted its best start of the year since 1998.
Before we get too giddy here and sound the “all-clear” signal, we now are faced with a new set of issues. Specifically, the yield curve in the bond market just “inverted” which means the 3-month treasury yield is now higher than the 10-year treasury. Why is this important? Yield curve inversions have often been followed by recessions. However, it is important to point out that while a recession has always been preceded by a yield curve inversion, not all yield curve inversions have been followed by a recession. In other words, this indicator is indeed alarming but it does not necessarily mean that we are headed for a recession.
The yield curve and macro-economic news will likely be the center of attention for the next several weeks. Clearly, interest rate hikes are now off the table which is the reason for the rally over the past quarter. However, the recession fears will certainly creep into the narrative in the coming weeks. As the news feed plays out over the next several weeks, that will likely fuel the debate for interest rate moves and of course dictate the moves in the yield curve. It should make for an interesting and possibly volatile quarter.
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