The month of March saw mixed returns for stocks as the best quarter since 2009 came to a close. Large cap stocks in the U.S. put up decent returns, with the S&P 500 up by 1.94 percent in a month where many market watchers expected a pullback after a double digit return in the prior two months. Smaller and mid cap stocks did not fare as well. The S&P Small Cap 600 index lost 3.33 percent and the S&P Mid Cap 400 index lost 0.57 percent in March. Internationally, both developed and emerging markets were essentially flat in March. Fixed income investments did very well in March due to a fall in interest rates. The Bloomberg Barclays U.S. Aggregate Bond index was positive by 1.92 percent in the month, which is a stellar one month return for bonds.

March was chock full of worthy investment news. On March 20, the Federal Reserve announced, as expected, that it would not increase the Fed Funds Rate in the first quarter. It went further to say that it does not expect to increase rates at all in 2019. This second point, while not a complete surprise to Fed-watchers, was still remarkable for the fact it was Chairman Powell’s most explicit statement on the matter so far. Bond yields reacted as you’d expect, which is to say that they declined. The yield on the 10-year U.S. Treasury bill, which had already been in decline from its March 1 starting point of 2.76 percent, fell as low as 2.53 percent on the day of the Fed’s announcement and continued to drop through the rest of the month. The 10-year yield finished March at 2.41 percent. Stocks rallied on these developments until March 22, when the long feared recession predictor—an inverted yield curve—showed up for the first time since before the Great Recession. The yield on the 3-month U.S. Treasury is now higher than that of the 2-year, 5-year and even 10-year Treasuries. This inversion, which took place on March 212, but was still in place at month’s end, is remarkable to consider: it costs more for the U.S. government to borrow over just three months than it does for the government to borrow for 10 years. We have written significantly about this phenomenon in past newsletters and won’t cover it again here, other than to say that while yield-curve inversions do precede recessions, there is a lot of variability in terms of how soon recession follows. Another point being made by many professional investors is that yield-curve inversion is less predictive this time because interest rates across the board are lower than in the past. While we don’t believe the March inversion is cause for panic, we are also wary of those who say, “this time is different.”

Adding to the alarm of the inverted yield curve, markets saw mostly disappointing economic news released during March. Labor data were released on March 8, and while average earnings increased at an attractive 3.4 percent pace from the same time last year, the number of jobs added in February was significantly below the average and the consensus. Only 20,000 nonfarm jobs were added, compared with the 180,000 expected by the consensus. The Markit Manufacturing and Services PMI indicators both decelerated to 52.5 and 54.8, respectively (though anything over 50 is an expansion). One bright area that saw a turnaround from recent months was new home sales, which came in at 621,000, above the forecasted 600,000. This is likely due to drop in interest rates in 2019 making homes more affordable. It will be interesting to see how housing demand keeps up as the spring buying season gets underway with relatively low rates to boost buyers.

The Brexit crisis remains in limbo after UK lawmakers failed to pass the withdrawal agreement that Prime Minister Theresa May brought to vote on March 12. This was supposed to lead to a deal-less divorce between Britain and the EU on March 29, but the EU granted a postponement before that deadline which extends the decision deadline to April 12. Protestors took to the streets to demand a second referendum to give Britain the possibility of reversing the June 2016 decision. March ended with a desperate gambit from PM May in which she agreed to step down from her post if parliament passed her agreement (it didn’t). She likely had no choice but to offer this, as the House of Commons passed a vote to remove the May Cabinet’s control of the Brexit process on May 25. It remains to be seen whether any real progress will be made in resolving the Brexit crisis by the new April 12 deadline, but we aren’t optimistic.

Considering the rapid rise of stocks through the end of February coupled with arguably net-negative news during March, market returns for the month should be viewed positively. It’s tempting to think that there might not be much juice left to squeeze out of the stock market in 2019 given the strong returns through Q1. While it’s certainly possible most gains have already been made, it’s important to look back just a few months further to the last quarter of 2018. Viewing returns in that context, we wouldn’t be surprised if markets continued to rally, albeit choppily, through the rest of the year.

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