May 2019 Market Update

Brian Johnson
Brian Johnson
CIO and Shareholder

By Brian Johnson, Viridian Chief Investment Officer and Shareholder

Market Commentary

May 22, 2019

Summary:  Considerably more money has been flowing into bonds recently than into global equity (stock) markets.  That, plus continuing trade war escalation and some borderline indicators, are keeping us underweight equities in our Viridian Conservative and Viridian Balanced model portfolios.

Although the first four months of 2019 saw positive stock market returns, investor interest in equities has actually been waning.  Per Ned Davis Research (NDR), net U.S. and international equity flows—including equity ETFs (exchange-traded funds) and traditional equity mutual funds—have remained negative this year.  Bonds, on the other hand, have seen strong inflows since January.  In fact, over the past year, a net of $169 billion has flowed into bonds while a net of $135 billion has flowed out of stocks.

Consistent with these fund flow figures, we’ve seen bonds outperform world stock markets as a whole over the past year (5/17/18 – 5/17/19), with the Barclays Global Aggregate Bond ETF (AGG) up 6.77% and stocks in the All Country World Index ETF (ACWI) up just 0.15% over that period.  U.S. stocks, as measured by the S&P 500 ETF (SPY), have done better—up 7.13%—but even that just barely outperformed bonds (as measured by AGG). 

In fact, since we moved our Viridian Balanced model from its equity “overweight” position (70% stocks) to a “neutral” position (60% stocks) in July of 2018 (i.e., 7/16/18 – 5/19/19), the SPY (U.S. large-cap stocks) has gained just 3.86%, and the ACWI (World large and mid-cap stocks) rose only 0.20%, whereas the AGG bond ETF gained 4.93%, better than both of those (U.S. and world) stock benchmarks.  We reduced equity exposure even further in both the Viridian Conservative and Viridian Balanced strategies—to “underweight” stocks, meaning 50% and 40%, respectively— in November of 2018.  Since then, we’ve seen the AGG (bonds) move higher by 6.02%, whereas the SPY is up 5.96% and ACWI is up 5.54%.  Factoring into these results is the fact that stocks experienced nearly a 20% drop from their September 2018 highs to December 2018 lows; the AGG bond index actually rose during that period.

So… what now?  

The stock market remains vulnerable to negative developments surrounding U.S. and China trade negotiations, which are hurting the economies of both countries.  Also, we continue to closely watch interest rates; we are especially on the lookout for an “inverted yield curve” (i.e., short-term interest rates higher than long-term rates), since that has historically been a leading indicator and harbinger for the U.S. economy heading for a recession.  No recession is on the horizon yet, at least in the next 12 months, but it is certainly possible that one could start sometime in 2020-2021.

Investor sentiment surveys show continued investor optimism (which is, ironically, a bearish “contrarian” indicator), and valuations (e.g., P/E ratios) are still on the high side.  Any slowdown in earnings growth, therefore, could make the market vulnerable to another pullback (decline).  On the other hand, if earnings remain strong, and we get a moderate pullback in stocks that reduces optimism (as happened in December of 2018), coupled with an end to the U.S./China trade spat, the market may very well resume its long-term uptrend.

For now, we continue to be slightly underweight equities (a somewhat defensive, cautious posture) in our Viridian Conservative and Viridian Balanced strategies.  In addition, our stock sector allocations remain on the conservative side.  That is true not only in those two strategies, but in our Viridian Growth strategy, as well, relative to what you saw for roughly 2½ years prior to the aforementioned shifts last July and November. 

As always, it is our privilege to serve you.  Should you have any questions at all, please don’t hesitate to reach out to your Viridian Financial Advisor.

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