NovaPoint: 2Q Market Update

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“V” is for V-shaped recovery. The fear and pessimism seen in the fourth quarter of 2018 quickly turned into the best start for the S&P 500 Index in a decade.

What caused the reversal of fortune? We think the main factor aiding the market was the change in posture from the Fed. The Fed raised interested rates three times in 2017 and four times in 2018. This slow, methodical pattern allowed rates to return to normal, but not at a pace that might choke off economic growth. When some economic data showed weakness early in the fourth quarter of 2018, the methodical pattern suddenly became worrisome. Would the Fed keep raising rates regardless of how the economy was performing?

NovaPoint Chart


Once the Fed changed to a more patient, data dependent stance in early January, it removed the risk that the Fed would push the economy over the edge. This gave support to equity investors and the market started regaining ground. A combination of good fourth quarter earnings reports and some optimism that the U.S. and China would make progress on a trade agreement kept the upward momentum throughout February and March. The global economy has slowed, but that risk has been digested.

Not all sectors have fared the same in the 2019 rebound. Healthcare was 2018’s best performing sector, but has now trailed more cyclical sectors such as Technology, Industrials, Real Estate, and Energy. Financials rose with the market in January, but have since cooled as a flat yield curve may pressure profitability for banks. Higher oil prices have boosted the Energy sector, but higher gasoline prices can put a crimp on discretionary spending in Consumer sectors.

We don’t time the market and we don’t time sector rotations. Our equity holdings are well diversified across sectors. We favor high-quality stocks with a demonstrated track record of increasing dividends as we believe they are more durable through economic cycles.

For clients with fixed income holdings, we are extending duration and increasing credit quality. We are less concerned about the pace of rate increases and now more concerned about the quality of corporate balance sheets.


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