Data as of March 31, 2019
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After suffering their worst quarterly decline in a decade to close out 2018, stocks bounced back in the first quarter of 2019 and erased most of their losses. The large‑cap benchmarks ended within roughly 4% of the all‑time highs they established in September 2018, while the S&P MidCap 400 Index and small‑cap Russell 2000 Index remained 8% and 12% from their peaks, respectively. Reflecting improved sentiment and the return to a “risk on” environment, volatility—as measured by the Cboe Volatility Index (VIX)—moderated throughout the quarter.
The technology‑heavy Nasdaq Composite Index performed best for the period. Within the S&P 500 Index, tech shares also performed well, gaining nearly 20% on a total return basis (including dividends), followed by real estate and industrials shares, which gained 18% and 17%, respectively. Energy shares were also particularly strong, helped by a rebound in oil prices. Health care shares performed worst, weighed down by some prominent failures in new drug tests and concerns over CVS Health’s attempts to integrate its recent takeover of Aetna. Financial shares also lagged as a plunge in long‑term interest rates threatened bank lending margins.
Doubly Dovish Turn In Monetary Policy Restores Confidence
The monetary policy environment for equities brightened considerably in the quarter, providing a powerful tailwind to sentiment. The S&P 500 scored its best daily gain for the quarter on January 4, after Federal Reserve Chairman Jerome Powell stressed to a group of economists that the Fed would not hesitate to respond with all the tools at its disposal to counteract an economic downturn or financial turmoil. Minutes from the Fed’s December meeting also encouraged investors, with policymakers citing their awareness of “concerns about downside risks evident in financial markets and in reports from business contacts.”
The Fed’s signals following its January 29–30 policy meeting provided further encouragement, helping send the S&P 500 Index to its second‑biggest daily gain for the quarter. The central bank decided to keep rates steady, as was widely expected, but investors were cheered by an unexpectedly “doubly dovish” post‑meeting statement, which removed all references to further rate increases and called into question whether the Fed would continue to wind down its balance sheet. Stocks jumped again after the Fed’s next meeting on March 19–20. The summary of individual policymakers’ economic and policy projections released after the meeting showed that 11 out of the 17 Fed officials who set policy now expect no rate hikes in 2019, while four expect just one. Indeed, markets began pricing in a significant possibility that the Fed’s next move would be to cut rates.
|Dow Jones Industrial Average||11.81%||11.81%|
|S&P 500 Index||13.65||13.65|
|Nasdaq Composite Index||16.49||16.49|
|S&P MidCap 400 Index||14.49||14.49|
|Russell 2000 Index||14.58||14.58|
Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended March 31, 2019. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.
Global Growth Slows
The downside of the about‑face in Fed policy was the reason driving the change—continuing signs of a moderation in U.S. growth and a much sharper slowdown overseas. Chinese and European growth expectations ratcheted lower throughout the quarter, and Wall Street had one of its worst days on March 22, following news of a sharp contraction in the export‑sensitive German manufacturing sector. U.S. manufacturing continued to expand, but at a significantly slower pace. The U.S. housing sector also weakened, particularly in terms of new construction. Consumer spending and business investment generally disappointed as well, held down in part by the partial federal government shutdown, which lasted through most of January. Labor market signals remained strong through most of the quarter, but February job gains, reported on March 1, were at the lowest level in 17 months.
Corporate profit growth also appeared to be moderating, although not as much as expected. Investors appeared to respond positively overall to fourth‑quarter 2018 earnings reports as they were released in January and February. According to FactSet, overall quarterly profits for the S&P 500 rose 13.3% in the quarter versus a year earlier, somewhat above estimates.
Prospects Improve For Trade Deal
Hopes for a trade deal between the U.S. and China improved as the quarter progressed, providing an additional boost to markets. Early in the quarter, stocks rose after President Trump tweeted that trade talks were “going very well” and again on February 12, after he told reporters that he would be willing to extend a deadline to increase tariffs if the two nations were nearing a deal, which he did two weeks later. On March 22, President Trump told an interviewer that the two sides were “getting very close” to a deal as U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin prepared to travel to Beijing for the next round of face‑to‑face talks. Mnuchin’s tweet that the talks had been constructive seemed to be one factor in the market’s strong rally on March 29, the last trading day of the quarter.
Slowing Growth And Earnings Highlight Importance Of Stock Selection
The Fed’s dovish turn and growing hopes for a trade deal have moderated two of the primary sources of uncertainty that derailed markets late in 2018. The growth worries that emerged in late 2018 remain a more persistent source of concern, but it seems likely that a recession will be averted in the coming year. Earnings growth will be harder to come by, however, as the impact of the December 2017 tax cuts on year‑over‑year comparisons rolls off and fiscal stimulus wanes. This could favor an active approach to investing, along with careful fundamental research to find companies able to leverage competitive advantages to prosper in a more challenging environment.
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The views contained herein are those of the authors as of April 2019 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.
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