Catherine and Carrie have chosen their spring vacations on opposite ends of the spectrum. Carrie went snow-skiing in Colorado following the most snowfall they had seen in years. Catherine is spending her spring vacation soaking up the sun on a Caribbean island. While many places in the U.S. reached all-time records of snowfall this winter, the “meltdown” has begun and spring is on its way. However, as you are well aware, the market already had its “meltdown” in December and has been steadily “melting up” ever since.
Though brief “pauses” and corrections along the way are to be expected, we believe the overall trend will continue to be up and not down.
You have likely heard much ado about the “inverted yield curve” being an ominous omen of impending doom. However, we believe the REAL yield curve to watch is the 3-month Treasury bill to the 30-year Treasury bond…and it is nowhere near inversion. So, if you hear the “yield curve” is “inverted”, then they are referring to the wrong yield curve.1
The second myth regarding the yield curve is that when it does invert, a recession always follows. While it is true that every recession since 1962 has been preceded by an inversion…it’s important to remember that not every inversion has been followed by a recession.1
The pundits would also have you believe earnings are going to fall farther than Tacko Fall when he loses his balance. We do not believe this to be the case either. Certainly earnings growth has slowed, however not at an alarming rate. In fact, approximately 70% of companies reporting earnings this past quarter have beat analysts’ expectations.2
In the many years I’ve been in this business, I do not ever recall the Fed announcing ahead of time that it would not be raising interest rates the rest of the year. We have often observed the market hates uncertainty…and the Fed gave us a rare dose of certainty with their recent announcement. In fact, Larry Kudlow as well as Steve Moore (recently nominated as a Fed Governor) are even talking about actually cutting interest rates fifty basis points.3
We realize our encouragements to “stay the course” and keep a long-term perspective are mostly “preaching to the choir”, as most of you are experienced long-term investors. However, the graph below just reiterates the importance and rewards of long-term investing. While 81% of 1-year periods since 1970 were positive on the S&P 500, 95% of 10-year periods and 100% of 20-year periods were positive.
Chart Source: BMO Global Asset Management, December 2018
In summary, while noting that short-term pullbacks, like breathing in and breathing out, are a normal part of a secular bull market, we continue to believe we are in a healthy bull market.
We hope you have a wonderful Easter. As always, we greatly value your trust and friendship.
1Jeff Saut, March 25, 2019
2MarketWatch, February 22, 2019
3CNBC.com, March 27, 2019
4CNBC, March 28, 2019
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