April 2019 Market Update
Summary: Q1 was a great quarter. We will likely continue to use market pullbacks to increase equity allocations.
When we first reduced our equity allocations in July of 2018—from “overweight” stocks (where we had been since April of 2016) to a “neutral” stance—we did so because fundamental evidence suggested that stocks would have a tougher time going forward than they had the prior couple of years. Odds simply favored easing off the gas a bit.
Markets peaked in October of 2018 and, by November, further deterioration in global fundamentals led us to again reduce our stock exposure, this time from neutral to “underweight.”
These reductions in equity exposure are manifested differently across our strategies: in Viridian Balanced and Viridian Conservative, they resulted in our removing roughly 10% of the accounts’ money from stocks each time, as well as shifting some of the money that remained in stocks into more conservative sectors. In Viridian Growth, which generally keeps 100% of its money in stocks, it just meant shifting some of the portfolio from more aggressive to more conservative sectors of the market. In Viridian Aggressive, it meant taking some profits and temporarily raising cash levels.
In November and December, we experienced the sharp pullback that the fundamentals foreshadowed. The big surprise was how quickly the stock market rebounded, having an incredible rally since the low was reached on Christmas Eve.
In the first quarter of 2019, that rally saw the S&P 500 index (U.S. large-company growth stocks) rise by 13%. Small-company stocks (Russell 2000 index) rose 14%. Developed international stocks (MSCI EAFE index) were up slightly less, gaining 10%. With the Federal Reserve (Fed) announcing that it would be more “patient” in raising short-term interest rates for the remainder of 2019, bond prices rose (and interest rates, which move the opposite direction, fell). The Vanguard Intermediate-Term Treasury Fund, for instance, jumped 2% in value in Q1.
It really was a great first quarter for both stock and bond investors. If you had told us entering 2019 that stocks would finish at these levels for the year, we’d have been happy. The rally might not be over but, going forward, we certainly don’t expect the advance to continue at this pace.
A change in sentiment indicators since the December low is also notable. Extreme pessimism has been replaced by extreme optimism. In fact, an NDR Global Sentiment index shows the highest levels of optimism on record, dating all the way back to 2002. Because sentiment is a contrarian indicator, these levels, which reflect a high level of investor exuberance, suggest a near-term market pullback.
Although we’ve already redeployed most of the cash in our Aggressive strategy, in order for us to consider it safe to significantly increase stock allocations in the Balanced and Conservative strategies, we’d prefer to see sentiment drop to more neutral levels. In addition, we need to see a number of fundamental “risk on/risk off” indicators signal that the risk-off environment of Q4 2018 was as bad as it’s likely to get for a while. In particular, a steeper, more normal yield curve (long-term bond yields significantly higher than short-term yields), together with bond yields back at Q4 levels, would confirm that markets have begun to anticipate a renewed global economic recovery. Meanwhile, we are maintaining a somewhat cautious stance in our more conservative strategies.
We watch the markets and economic indicators on a daily basis, but we hope you don’t feel a need to. We manage your investments in accordance with the strategies that you and your Viridian advisor determined are consistent with your goals, and that is in part so that you don’t have to lie awake at night wondering how the yield curve or stock market will impact your long-term financial situation. Of course, if your goals change, please be sure to reach out to your advisor right away. Meanwhile, it is our continued honor to serve you.