1Q 2019 Market Summary
Asset prices rallied in the first quarter of 2019, marking a strong rebound from the December correction. The S&P 500 Index rose 13.7% during the quarter, buoyed by low valuations at the start of 2019 and accommodative statements from Federal Reserve officials. The impressive returns marked the strongest quarter for the S&P 500 since early 2009, when stocks bottomed out following the Financial Crisis. It is worth noting that the recent 10-year anniversary of that market bottom results in a 10-year annualized return for the S&P 500 of almost 16%, well above the historical long-term average of closer to 9%–10% for the index. Given a much higher starting point today, investors might expect more modest performance over coming years.
Every sector in the S&P 500 participated in the first quarter rally. The S&P Technology Sector Index rose 19.9% during the quarter, while industrial and energy stocks rose 17.2% and 16.3%, respectively. Relative laggards during the quarter included the financial sector and healthcare stocks, which rose 8.6% and 6.6%, respectively. Small cap U.S. equities returned 14.6% during the quarter.
Many longer-term trends persisted across the equity asset class in the first quarter. Growth stocks outperformed value stocks during the quarter, with the Russell 1000 Growth Index up 16.1% compared to 11.9% for the Russell 1000 Value Index. U.S. stocks continued to outperform non-U.S. stocks, with the MSCI EAFE Index posting a respectable 10% return during the quarter, but still lagging the S&P 500. The MSCI Emerging Markets Index rose 9.9% during the quarter.
Interest rates declined across the yield curve during 1Q19, resulting in continued flattening and even inversion across certain maturities. The one-year Treasury rate declined .21% to end the quarter at 2.39%, higher than 2.24% for five-year Treasuries and only slightly below the 10-year rate of 2.41%. After raising their key Fed Funds rate in December 2018, the Federal Reserve hit the pause button during the first quarter in response to market volatility and signs of a slowing economy and lower inflation. The market no longer expects additional rate hikes during 2019 due to the Fed’s changed tone.
Declining rates across the yield curve resulted in relatively strong bond returns during the quarter. The Bloomberg Barclays U.S. Aggregate Bond Index returned 2.9%, while the Bloomberg Barclays U.S. Corporate Bond Index returned 5.1%. Lower-quality bonds also performed well during this “risk-on” environment. The Bank of America Merrill Lynch High Yield Index returned 7.4% during the quarter. Municipal bonds performed in line with the broader market and the Bloomberg Barclays Municipal Bond Index returned 2.9% in the quarter.
After a difficult end to 2018, commodity prices bounced back to start 2019. The Bloomberg Commodity Index returned 6.3% during the quarter as oil prices rose from $44 for a barrel of West Texas intermediate oil to over $60 at the end of March. The LBMA Gold Price Index returned 1.3% in the quarter.
Sources: MorningStar and Federal Reserve Bank of St. Louis