Global equities marched higher this week, with the onslaught of relatively benign or positive news emerging on multiple fronts. The avoidance of another government shutdown, despite the acrimonious method in which it was achieved, provided relief to one of the many outstanding headwinds of 2019. Stocks have rarely in history had such a strong start to the year, but after the December plunge in prices, they have just eliminated most of the losses from the 4th quarter of 2018. One of the unique aspects of the recent rally has been the absence of leadership in the market, with the breadth of gains significantly higher than in the past several years. Stocks across the spectrum, from energy, utilities, and technology to financials and health care have all rallied in tandem. Bond yields meanwhile appear anchored lower, as investors seek safety from multiple possible flashpoints this year. The disconnect between bonds and equities is reaching extremes, with one side likely to break in coming weeks with either a stock market selloff or a rise in yields. With bonds signaling fear and lower growth and stocks showing optimism and upside ahead, both cannot be right forever.
The Federal Reserve minutes from the January meeting were released this week, which showed a mixed bag of policy considerations and opinions on the US and global economy. While the Fed reiterated their stance on the strength of the US economic outlook, there were several factors that were worrisome and noteworthy, including trade concerns, the shutdown, and international growth weakness that could disrupt the ongoing expansion. The minutes also showed that the majority of Reserve officials back a slowing or halting of the balance sheet runoff program, where the Fed is slowly reducing their bond holdings from the quantitative easing program of the last several years, hoping to keep monetary policy from being too restrictive. Market participants had mostly come to the conclusion that Fed hikes were off the table for the remainder of the year, but the minutes showed that additional rate increases were still a possibility. Leaving this option open could be unnerving to market participants going forward.
For now, we are maintaining our position that equities in the US are mostly fairly valued, and that more upside is dependent on increased earnings, a positive outcome in the China trade talks, or a sensible plan for Brexit. However, positive earnings surprises seem somewhat unlikely in the next quarter, the China trade issues will not easily be resolved, and Brexit remains up in the air. These issues leave us more cautious than optimistic of a meaningful rise higher in equities, and a breakout to the upside would likely be technically driven and short lived, in our opinion. While we believe stocks will end the year higher, it could be a rocky road before reaching the final destination. For those reasons, we will maintain a balanced approach across the portfolios, in an effort to be best positioned for volatility that may emerge from any of the headlines risks mentioned.