The markets have been moving higher over the last month and have now erased the entire correction we experienced in the fourth quarter. Investors have been betting on an improved global economy with the US acting as the primary catalyst. That said, we have seen certain sectors take over leadership while others lag. As an overview:
Technology – leader —Technology has been leading the recovery with names like Apple, Amazon and Google leading the charge. The main reason for the outperformance in this group is simply the strength of our underlying economy and the discretionary dollars that are being created at both the retail and corporate levels. In addition, we are experiencing a lot of innovation around the world today.
Financials – leader — The drivers behind the financial sector are the same as the technology space. The strength in the economy is creating more loans and more business growth that is being funded by the banks. As well, rising rates are typically very good for margins. So, financials are becoming more profitable as rates rise.
Healthcare – laggard — At times, sectors can suffer by their own success. Healthcare has been a leader over the last couple years, but we have started to hear more rumblings about “Medicare for all” which has spooked healthcare investors. Long term, we feel healthcare will be fine, but, in the short-term, it’s lagging.
It’s been a “tale of two markets” in the last six months. In the fourth quarter of 2018, we experienced a quick downdraft, culminating into the first bear market in ten years. This year, we started off like a rocket ship, regaining most of what we lost late last year. So, this kind of volatility begs the question, “Where are we going from here?”
There are several headlines/themes we think help us answer that question:
Continued Global Growth Concerns —This was the main driver behind the December portion of our correction. Europe, the red-headed step child of the global economy, is currently facing the shadow of Brexit and Italy is now officially in a recession. Couple that with the slowest growth in China in over nine years, and you have a recipe for concern. That said, most international markets are up this year, which tells us investors think the worst is over.
The US Economy—As weak as our global brethren have been, the American economy has been equally as positive. The US economy experienced significant growth in the last three quarters of last year and, if the start to 2019 is any indication, we look to be carrying over our momentum. Our economy is still the 800lb gorilla in the global economy, so our strength will help pull the rest of the world out of their doldrums.
Internals and Leadership—It’s always important to pay attention to subtle shifts in the market leadership. To this point, technology and consumer discretionary stocks have led us higher. It will be very telling if these cyclical groups continue to lead and could very well signal that we will hit new highs at some point this year. If leadership turns to more defensive industries, it may be a signal that we have more volatility ahead.
In the end, there were a lot of circumstances that led to our end of the year slump. But, we continue to believe the strength of the US economy will ultimately drive strong corporate earnings, which will push equities higher. For now, we remain in the bull camp and are very encouraged by the market behavior over the last five weeks. But, we have a raised eyebrow for indications that may tell us we need to get more defensive if the rest of the world doesn’t begin to recover.