The long, painful market decline in the last month of 2018 seemed to promise more of the same for the new year of 2019, but at the end of the first quarter, the results couldn’t have been more different. The U.S. market, measured by a variety of indices, posted its biggest one-quarter gain since the third quarter of 2009. This proves once again (as has been proven many, many times over) that you cannot extrapolate market returns from one month to the next, or expect that down or up trends will lead to more of the same.
These are, by any measure, extraordinary returns for a short three-month investment horizon, and nobody should expect that returns will continue at this pace for the full year. But the remarkable upsurge in stock prices does offer a lesson. Investors who took the December opportunity to buy stocks when they suddenly (and rather unexpectedly) went on sale are doubtless cheering their good fortune, but the larger number of investors who held on through December to reap the gains of 2019’s first quarter should be similarly cheerful. Selling into the downturn, hoping to avoid more losses, was a losing strategy.
Why are stock prices rising despite concerns about the yield curve inversion and persistent predictions of an upcoming recession? The answer could lie in some pleasant surprises that were contrary to what many investors were expecting. The Federal Reserve Board startled long-term market observers, in a good way, when it abandoned plans to continue hiking interest rates. Higher rates are considered impediments to higher market valuations for two reasons: they create more competition in the form of bond yields, and they raise borrowing costs for companies looking to expand.
It is worth remembering that some of the steepest rises in market indices come right before a bear market, when investors become over-enthusiastic despite declining fundamentals and high valuations. We do not seem to be in that territory yet, but nobody knows for sure. It’s always best to be cautious when the markets are rising fast, and optimistic when stocks go on sale. Actually doing these things is counterintuitive and very difficult emotionally, but for the intrepid, it has historically been a winning investment strategy.Categories: Important Updates