Investors celebrated as U.S. stocks posted the best quarter of returns since 2009. The backdrop for these gains was the equally spectacular stock market decline in the final quarter of 2018. Impressively, the rally came within the context of an economy and geopolitical backdrop that were persistently providing headwinds. Weakening economies globally, uncertain progress with Chinese trade talks, and a disruptive Brexit process all worked to sour sentiment. Yet equities rose. Ultimately the stock market succumbs to fundamentals, and despite the obvious headwinds, the fourth quarter declines left stocks too cheap relative to fundamentals. The impressive start to 2019 has corrected that imbalance.
Headlines this Quarter
- The first quarter has been the best quarter since 2009 for U.S. stocks. About 90% of S&P 500 is up year to date. Small Cap outpaced Large Cap modestly, and Growth far outpaced Value.
- IPOs are coming back in fashion. In the past four months, there were no IPO’s, but the Q1 rally prompted Levi Straus & Co (LEVI) and Lyft (LYFT) to pull the trigger. Other closely watched IPO’s like UBER, Airbnb, Pinterest, and Slack will join a crowded field of newcomers to the market this year. While these investments garner lots of excitement, IPO’s, on average, underperform the broader stock market over time. In general, we put these “opportunities” closer to the category of a gamble than an investment.
- According to Bloomberg, near 20% of global investment grade debt trades with a negative yield. Most bonds with negative yields originate in the European Union and Japan. In the U.S., the Fed’s recent softer language on its tightening plans has pushed interest rates back down, boosting bonds.
- On the international front, the Brexit drama, a softening European economy, and updates on trade negotiations between China and the U.S. have stolen all the headlines. While lagging domestic markets, international peers have also had an excellent start to the year.
For those that are intrigued by the growing buzz surrounding the IPO pipeline for 2019, we would say buyer beware. Historically, IPO’s have, on average, underperformed the broader market. There will always be some spectacular winners and many forgettable flops. For us, this puts this asset class more in the camp of a gamble (or entertainment) than an investment. We prefer to bias our client portfolios towards segments of the market that have a demonstrated, and justified tendency to outperform (think Quality, Value, Minimum Volatility). IPO’s do not clear that hurdle in our opinion.
The Week Ahead
- Friday’s non-Farm Payroll is expected to create around 175K jobs in March, while unemployment is expected to remain steady at 3.8%.
- Durable orders and shipments will provide some data on the state of domestic manufacturing activity.
- Manufacturing data across the European region will give some more insight into the economic development within the European Union (EU).
- The NCAA Basketball action continues this weekend with the Elite Eight.
Stock Highlights from Max
As the first quarter of 2019 ends, we look back on what transpired in our stock strategies. The top sector in the quarter was Technology thanks to a strong rebound from microchip equipment makers Lam Research Corp. (LRCX) and KLA-Tencor Corp. (KLAC), with each up more than 30% in the quarter. The worst sector was Health Care, partly due to fear of the Medicare-for-all proposal, partly due to a continued attack on the cost of health care and lastly stock specific issue with CVS Health Corp. (CVS), which was the biggest underperformer of our holdings. Alternatively, Ulta Beauty Inc. (ULTA) was the biggest winner, as the company continues to deliver sales growth. Moving on to stories of note…
- BB&T Corp. (BBT), the North Carolina headquartered bank, announced it will merge with rival Atlanta based SunTrust Banks Inc. (STI) in a $66 Billion deal. While the market is not sharing our enthusiasm for this deal, this is a big deal. The combined, yet to be named, bank will have roughly $442 Billion in assets, over $300 Billion in loans, and around $324 Billion in deposits. The deal is expected to close in the 4th
- The Walt Disney Corp. (DIS) completed its acquisition of most of the 21st Century Fox assets. More on the transformative deal in our The Madness of March
- Lastly, Boeing Co. (BA) had a 2nd tragic crash of its 737 Max plane in 6 months. The incident grounded the planes, delayed delivery of new planes, caused cancelation of orders, a costly fix, and a PR nightmare. Despite that, the plane maker’s stock was still up double digits for the quarter.
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