Welcome to Cardan Capital Partners’ fourth edition of “The Helm,” a quarterly market update providing a quick-hit look at general portfolio changes, our read of the markets and what we see ahead.
After 2018’s discouraging fourth quarter, Federal Reserve Chairman Jerome Powell and team produced a “V” bottom in risk assets, pivoting the Fed to a decidedly dovish stance for the rest of this year. This is a welcome development for investors that also may have produced a fabled soft landing for the economy. Time will tell, but for now, we think the bull market and the economy still have room to push forward. A pickup in growth and inflation and a substantial cooling of global trade tensions even could bring the Fed back to the table with rate hikes later this year.
Data Source: Bloomberg L.P. See disclosure 1 below.
Most asset classes are up strongly so far in 2019. Small-to-mid-cap value stocks, where we have positioned many of our portfolios, started this year with a surge of almost 20%. However, they hit a wall late February through March as fears of recession began affecting the markets. We believe those fears, while valid and worth monitoring, are still too early to act on. As the economy rebounds from this most recent bout of recession fears, we think value stocks once again will regain their footing.
Data Source: Bloomberg L.P. See disclosure 2 below.
January, February and March had positive performance. Historically, such a fast start to the year is not necessarily a cause for concern: When the year starts with each of the first three months positive, the rest of the year is generally rewarding. However, as always, past-period performance does not mean certainty into the future.
Data Source: Bloomberg L.P. See disclosure 3 below.
Something else to consider is that the first quarter’s ebullience may be tempered substantially as the traditional malaise of summer months slows returns.
Data Source: Bloomberg L.P. See disclosure 4 below.
As we have stated in previous reports, we remain on recession watch — but not so much that we are making evasive maneuvers to portfolio allocations. As can be seen below, the almost negative spread between the 1-year and 10-year Treasurys is signaling growth into the future will be less than today but is not yet recessionary. The credit markets are also unconvinced a recession is imminent as credit spreads remain tight — for now.
Data Source: Bloomberg L.P. See disclosure 5 below.
As the yield curve gradually plumbs new lows, there will be voices suggesting this time will be different. Some are suggesting there are a multitude of things distorting the bond market — mainly the Federal Reserve’s quantitative easing — and that a yield-curve inversion may not be a reliable signal of recession this time around. We would caution against listening to this siren song because the last two times the curve inverted (2000 and 2006-2007) there were seemingly rational explanations of why it was giving a false signal. To be clear, the yield curve is not inverted and not signaling imminent recession — but it is uncomfortably close.
Let’s review the history:
2006-2007 Inversion (2008 Recession): Then-Fed Chair Ben Bernanke called out a global-savings glut widely theorized as the stated cause for global investors snapping up U.S. bonds. These global buyers were increasing bond prices and, therefore, pushing down yields “artificially,” causing an inversion that was not forecasting an impending recession. The Great Recession soon followed.
2000 Inversion (2001 Recession): The U.S. government had run a budget surplus and issued long-dated government bonds in reduced volumes. The dearth of available bonds forced buyers to push up prices of bonds that did exist. Those elevated prices and reduced yields caused, in the minds of some, an inversion that should be viewed as another false signal because of the “artificial” construct of the bond market that resulted. A recession soon followed.
This Market Watch article also addresses the two periods we reference here, and the dismissal of the inverted curve before the 1990 recession.
As a reminder, the S&P 500 historically has dropped about 35% in periods associated with recessions (post-WWII), and the 10-year Treasury has increased by about 12% in those same periods.
Data Source: Bloomberg L.P. and Morningstar U.S. | Ibbotson Associates. See disclosure 6 below.
As always, we remain attentive to overall economic indicators and market conditions.
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Disclosure 1: Bloomberg price chart of the S&P 500 Price Index from 4/6/2018 to 4/17/2019. These charts are for illustrative purposes only and do not represent the performance of any investment or group of investments. An individual cannot invest directly in an index. Past performance is not indicative of future.
Disclosure 2: This table is for illustrative purposes only and not meant for consumer trading decisions. Total Returns are those of Exchange-Trade Funds (ETFs) net of fund fees.Past performance is not indicative of future returns.
Disclosure 3: Total returns of the S&P 500 Index for time periods shown. These charts are for illustrative purposes only and do not represent the performance of any investment or group of investments. An individual cannot invest directly in an index. Past performance is not indicative of future.
Disclosure 4: Average Monthly Total Returns for the S&P 500 Index since 1980-2018. These charts are for illustrative purposes only and do not represent the performance of any investment or group of investments. An individual cannot invest directly in an index. Past performance is not indicative of future.
Disclosure 5: Recession dates defined by the National Bureau of Economic Research (NBER). 1/10 curve is the spread between the 10-year and 1-year Treasurys. The Cardan Recession Watch Line relies on economic indicators to detect if the overall economy is weakening and approaching a potential recessionary period. It is an internal forecast only and not meant to be relied upon for consumer trading decisions.
Disclosure 6: Recession dates defined by the National Bureau of Economic Research (NBER). Stock returns based on the S&P 500 Price Index. Bonds represented by the Ibbotson® Long-term US Government Bond Index (20-year maturity) and the Ibbotson® Intermediate-term US Government Bond Index (7-10-year maturity). These charts are for illustrative purposes only and do not represent the performance of any investment or group of investments. An individual cannot invest directly in an index. Past performance is not indicative of future.