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Steve's Newsletter

Steve's April 2019 Newsletter

Following a dismal end to 2018, the stock markets enjoyed a great first quarter and a wild opening to 2019! The S&P 500 was up 13.07% and the Dow was up 11.15% for the first quarter. Positive feedback from ongoing negotiations between the United States and China, coupled with strong job growth, low inflation, and stable (at least for now) interest rates, helped fuel investor confidence that pushed the indexes to first quarter increases not seen in decades.

Over the short term, anything is possible; but, at current prices, I would not expect too much in terms of additional 2019 stock returns. I believe the market could be higher at year's end, however getting there will be rough!

Stocks usually rally when the economy appears strong, and bonds usually rally when the economy appears weak! Since the financial crisis, stocks and bonds have rallied in tandem in response to low interest rates. They continued that trend in the first quarter of 2019. This current market rise can almost entirely be laid at the feet of the Federal Reserve and its reversal to not raise interest rates as they had previously announced.

That pause in interest rate increases has most likely pushed off into the future the end of the business cycle and an imminent recession! However that pause also might cause a much deeper and longer recession; when it does finally occur. Why, because one of the best tools to fight a recession when it does occur, is to "lower interest rates!" If rates are already low going into a recession, then there is not much distance between the present interest rate and 0%. It is possible that the Feds lack of independence is creating a future recession of greater depth and length then necessary.

It is concerning that stock gains in the near term, might have exceeded the markets fundamental underpinnings. Upcoming first quarter corporate earnings could be subdued because of headwinds facing worldwide earnings growth. Possible downward revisions to future corporate earnings also present a risk to stock markets. A positive outcome of US and China trade talks could already "be baked into the present markets."

That being said, it is mathematically and historically correct that markets do perform well going into the latter stages of the business cycle prior to a downturn in the economy. The problem is that no one can predict with any clarity when that downturn will occur.

I don't see a recession or signs of a bear market at this time, but I remain disciplined and continue to prepare for the inevitable end of this cycle without needing to pinpoint the timing precisely and still partaking in gains between now and then.

As I have said many times, our mission at Newmarket Advisors, Inc is to first protect your wealth and beyond that it is to grow your wealth!

Regards,

Steve Newman