Investors couldn’t have asked for a better start to the 2019 calendar year. It was only a mere five months ago that the stock market was experiencing a nearly 20% correction from all-time highs and everything seemed doom and gloom. Fast forward to the present, and there seems to be an entirely different sentiment in the capital markets.
2018 was an unusual year in that the bond market was flat and stock markets across the globe were negative. Typically, bonds and stocks move in opposite directions of each other, which is why investors own both in a diversified portfolio. Stocks took a nosedive at the end of last year due to fear that the global economy was heading into a recession. Jerome Powell, Chairman of the Federal Reserve, came out at the end of last year and indicated that the Fed was going to be more patient in raising interest rates. Ever since these comments, risk assets such as stocks and high-yield bonds have taken off.
Economic data has continued to be positive as well, with no signs of a recession in the near future. Although GDP growth in the United States is slowing, it still remains positive. This was the goal of the Federal Reserve in raising interest rates, to prevent the economy from overheating but also to avoid a rapid slowdown that could force a recession.
There are worries that the stock market could have priced in all of its gains already for 2019. While it is unlikely that the stock market will continue its rapid trajectory through the end of the year, there really is no way to tell where the market will go from here. Trade talks between the US and China will continue to dominate headlines and have an effect on the markets. We still are in the later stages of the business cycle, so there will most likely be a bumpier ride for the stock market during the rest of the year.
If an investor is uncomfortable with fluctuations in their portfolio, it may be time to add more conservative investments, such as bonds, to act as a stabilizer. Barring any interest rate hikes, bonds should seek out a positive return for this calendar year. So far 2019 has been a very good year to be an investor in the stock market, but if 2018 has taught us anything, it’s that the stock market can deteriorate in a hurry. This uncertainty is why investors get compensated for the risk that they take, if they can stomach it.