After posting their worst December since 1931, U.S. stocks surged to their best January since 1987, followed by further gains in February and March. Once again, the markets surprised the consensus and demonstrated the folly of trying to predict short-term performance. Investors who bailed out of stocks during the year-end selloff experienced severe whipsaw as the market rallied. Larger-cap U.S. stocks gained 13.6% for the quarter, placing it in the top decile of quarterly market returns since 1950. As a reminder, last year’s fourth quarter 14% drop was a bottom-decile dweller.
Foreign stocks also rebounded sharply in the first quarter. Developed international markets gained 10.6% and European stocks were up 10.9%. Emerging-market stocks rose 11.8%, after holding up much better than U.S. stocks on the downside in the fourth quarter of 2018.
Fixed-income markets were also strong: High-yield bonds gained 7.4%, floating-rate loans were up 4%, and investment-grade bonds rose 2.9%. The 10-year Treasury yield fell to 2.39% during March, its lowest level since December 2017. Our tactical positions in actively managed flexible income funds also generated strong returns, outperforming the benchmark core bond index as a group this quarter.
Turning to alternative investments, our lower-risk alternative strategies fund generated a positive return that was better than core bonds but well below the soaring stock market. This is consistent with our performance expectations given its lower-risk and more–defensive positioning.
After suffering from several trend reversals earlier in the year, trend-following managed futures funds recovered with strong positive gains in March, pushing them into positive territory for 2019. These strategies were positioned to gain from falling trends in global interest rates.
The market rebound was predominately due to a U-turn in Fed monetary policy. After hiking interest rates four times in 2018, Fed officials suddenly reversed course. They emphasized they would be “patient” and pause any further rate increases. Admittedly, there were other positives for the markets as well: The federal government shutdown ended in late January, signals from the U.S.-China trade talks turned more positive, and the likelihood of a “hard Brexit” seemed to wane.
It certainly feels better to see strongly positive portfolio performance this quarter compared to the losses in the fourth quarter of 2018. But just as we wouldn’t extrapolate last year’s losses when looking out over the coming years, it’s equally important to temper our expectations on the upside after this quarter’s strong rebound.
If monetary and fiscal stimulus around the globe extends this cycle for another few years, we have exposure to a wide range of investments that will particularly benefit. These include global equities, with an emphasis on developed international, European, and emerging-market stocks; flexible income funds; and floating-rate loan funds.
On the other hand, if a recessionary bear market strikes, our holdings in core bonds, lower-risk hybrid and alternative strategies, and trend-following managed futures funds should perform well. And we would then be in position to tactically add back to riskier asset classes, such as U.S. stocks, at lower prices and higher prospective medium-term returns.
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Cyber Security: Our Focus on Protecting Clients
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Investment Key Takeaways—First Quarter 2019
Our portfolios generated strong performance for the first quarter, benefiting from the rebound in financial markets as they reversed much of the market downturns from fourth quarter 2018. The first quarter was a strong period for equities around the world. Bond markets and certain alternative strategies also performed well.
Commentary from Our Chief Investment Officer—First Quarter 2019 Review & Outlook
The market rebound was due more to a shift in Fed monetary policy than any meaningful improvements in the economic fundamentals. Our portfolios have exposure to a wide range of investments that will particularly benefit if global growth continues.