Stocks maintained momentum from January, though rose at a slower pace. Most major indexes have now recouped losses incurred in the month of December but remain below 2018 summer highs. International stocks are trailing the US so far in 2019.
Trade talks with China progressed in February, and the Trump administration delayed a planned increase in existing tariff rates to 25%. These increases would have had significant economic impact, and taking them off the table permanently may be the minimum resolution the market will accept to support recent gains.
The Fed reiterated a “patient” approach to monetary policy and an open mind toward moving interest rates either higher or lower depending on evolving data. This completes a departure from what had only recently felt like a predetermined path to higher interest rates. Historically, the Fed has tended to overshoot with both rate hikes and rate cuts. With most inflation measures remaining subdued and a strong dollar, the current approach feels appropriate to us.
S&P 500 earnings grew by 13% in the most recent quarter, helping support the robust start to the year. However, with 2017 tax cuts now factored into year-over-year comparisons and margins edging down from record highs, Q1 earnings are expected to decline modestly. While this is well known and should already be reflected in current prices, there is still the potential for investor unease if earnings do start shrinking.
Since late in 2018, volatility in capital markets has been driven primarily by trade, interest rates and earnings. Investor fears reached excessive levels in December, but adjusted quickly. These three storylines are likely to remain dominant for the foreseeable future, with trade being the most interesting for March. A diversified approach helps insulate against a concentration of risk in interest rate or trade sensitive issues.