The first quarter of 2019 was a nice change from what we saw in Q4 of last year.  And while it was one of the strongest first quarters since 1998 (cnbc.com), the S&P 500¹ still hasn’t recovered the all-time highs it reached in September 2018.  It ’s also been interesting to note that this quarter’s gains largely occurred in January and February.  The market was up only approximately 1% in March – half of which occurred on the last day of the month (source: FastTrack data).  March didn’t see much stock market growth, so our lowered exposure to it didn’t miss out on much. 

The Q1 rally appears to be weakening.  Last month’s newsletter suggested we were at an inflection point that could either take us to new highs, or send us back down to the lows we saw in December.  Our thoughts last month leaned slightly towards seeing new highs.  Now, after a month of what we view as weakening internals, we might lean slightly towards seeing the market going down a little bit from here.

Reasons:

The Yield Curve is nearly-inverting, and on some timeframes it already has.  According to Tony Dwyer, the curve to watch (the one that signals recessions) is when the 2 year Treasury Yield is higher than the 10 Year Treasury Yield.  That still hasn’t happened.  And even when it does, it doesn’t mean an immediate market crash, but rather an expected recession in 2 to 3 quarters (6 to 9 months).

However, what we have seen is the 3 Month Treasury Yield go higher than the 10-year.  We believe that inversion “signal” could mean recession by the end of 2019 or possibly in early 2020.  Also this week, we’ve seen many articles come out saying “it is different this time.”  I remember very well hearing that claim before: such as in 2000 before the tech crash, or in 2007 before the housing bubble.  And we all know how those ended…

Another factor that is giving us pause at this time is that small-cap stocks are no longer leading like they did (and tend to do) when the market is rising.  It was one of the factors that led us to be back in the market in January and February of this year.  But that has stopped since March (check out the chart below).

Our V3³ Indicator will be switching to “Growth” mode for the second quarter of 2019, as we expected after a strong first quarter.  However, due to other factors (including what we mentioned above), we may now be more protective in many of our core models in the shorter-term.

Bonds – The Aggregate Bond index (AGG) continues to be strong this year, currently up 2.94% YTD (ishares.com).  Much of bonds’ direction in 2019, we expect, will be dictated by what the Federal Reserve decides to do with interest rates and their balance sheet adjustments.  The Fed did announce in March that they may stop the rate adjustments going forward.  For now, the bond market appears to like that information.  But it is something we’ll continue to watch closely. 

Our goal, as always, is to keep risk small when it isn’t warranted.  And now that we’re starting to see factors that can signal a coming recession, we want to make sure we participate as little as possible in any major market downside.  That is, in fact, exactly why we started Shadowridge – to give investors options beyond traditional “buy and hold” (or “buy and hope”) methodology.

We hope you are having a great Spring, wherever you may be! 

1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
 
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.
 
3 V3 is a proprietary indicator developed by Shadowridge Asset Management, LLC. Its objective is to take several market sentiment factors and project how to view US stock market investment in the following quarter: for Safety, for Balance, or for Growth.