by Connor Darrell
CFA, Assistant Vice President – Head of Investments
The major global equity indexes posted their worst week of the year as investor sentiment was impacted by further evidence of a slowdown in global economic activity. In the U.S., the monthly jobs number came in far lower than expected, though there is reason to believe that the report was heavily influenced by weather-related factors. In Europe, the European Central Bank (ECB) announced that it intended to inject further liquidity into the European banking system in an effort to curtail the negative impact that trade tensions and geopolitical concerns have had on economic growth. Lastly, the Chinese government seemed to unsettle markets when it announced a new fiscal stimulus program aimed at increasing activity in its slowing manufacturing sector. Bonds climbed higher as rates fell amid the flurry of new economic data and policy developments.
The Pendulum Continues to Swing
At the beginning of December, the S&P 500 was trading right around the 2,790 level before negative sentiment drove the index to the brink of bear market territory. After a sharp reversal around Christmas and one of the strongest starts to a year in decades, the turmoil from December felt like a faded memory. But last week brought with it five consecutive days of negative returns for equity markets, leaving many investors wondering where we go from here
It’s important to remember that market performance tends to track earnings over the long-term, and earnings are largely driven by economic fundamentals. The fact is that economic fundamentals simply do not reverse course so significantly in such a short period of time. As such, it makes sense to inquire as to whether the market was too pessimistic during December or too optimistic during January and February? The answer is probably yes on both fronts.
Given the heightened uncertainty and slower growth rates being observed around the globe (as compared to 2017 levels), the current fair value for the market is likely somewhere in between December’s bottom and March’s peak. The market seems to have attributed much of the recent slowdown in China to continuing trade tensions with the United States, while in Europe, the uncertainty of the Brexit situation continues to impact business investment and economic activity. Clarity on both of these issues is likely to be provided before the end of 2019, and this may allow economic growth to reaccelerate by the second half of the year. But until then, the pendulum may keep swinging back and forth with markets stuck in a bounded trading range. For investors, this is a period where patience and discipline will be essential. We continue to favor a disciplined approach to tactical rebalancing rather than attempting to time entry and exit points.