The first quarter’s strong returns are a welcome relief after a dreadful fourth quarter in 2018, highlighted by one of the worst Decembers in history for U.S. stocks.  U.S., foreign developed, and emerging market stocks are all up significantly, led by U.S. stocks posting a 14.0% year-to-date return.  Global bond markets are also generating solid returns and outpacing inflation expectations.

What caused this dramatic turnaround?



An old investment saw sums it up nicely: “don’t fight the Fed.”  The “rule” suggests that an investor should buy stocks when the “Fed” (U.S. Federal Reserve) is lowering interest rates or keeping them low. Conversely, when the Fed starts to raise rates, investors fear the economy may stall and tip into recession, leading them to sell stocks. The general notion is to invest consistent with the current and expected monetary actions of the Federal Reserve Board. The challenge is that forecasting interest rates is much more difficult than it seems. But, like most investment rules, they are bound to work at some point, as evidenced by the late 2018 sell-off and subsequent early 2019 recovery.


Where do we go from here? We had concerns that the Federal Reserve was missing or ignoring signs of a global economic slowdown, including the U.S. economy, and raising interest rates multiple times in 2019 was a likely harbinger of a recession. With the Fed reversing course and signaling a pause in raising rates, the risk of a recession is reduced but not eliminated. Global economic growth continues to decelerate, highlighted by weak German economic growth. We are not out of the woods. We expect sluggish economic growth and slowing company profit growth with the boost from the 2018 corporate tax cuts behind us. As we learned in late 2018, the investing environment can change quickly. For now, “don’t fight the Fed.”