What a strong quarter to start the year! For U.S. large cap stocks (represented by the S&P 500), the first quarter of 2019 was the best quarter in almost a decade. It was also the best start to the year since 1998 — and that was more than 20 years ago.1 In March, the current U.S. bull market celebrated its 10th birthday, the longest in American history.
Over the past 10 years, we have seen tremendous growth across major U.S. market indices; the S&P 500 has more than quadrupled, the Dow has spiked 300%2 and the Russell 3000 has gained by about 350%.3 However, growth was not smooth the entire time. In 2018, cash was the top performing asset class, and all major indices ended the year in the red (except U.S. Fixed Income, which was essentially flat). The most recent dip was the Christmas Eve low, a moment where many investors feared the bear market had arrived. Yet a mere three months later, the market rebounded again.
Although the clouds around Brexit are still hanging over the global market, there is increasing optimism surrounding the U.S.-China trade talks, and a reversal in the Federal Reserve’s monetary policy stance seems to have boosted investors’ confidence as of late. Meanwhile the economy does appear to be slowing down. Year-over-year 2018 U.S. GDP growth was nearly 3%, but many expect it to moderate to a 2% pace this year.4 Although the fading effects of the tax reform in 2018 and slower global economic growth could bring some pressure to corporate earnings in 2019, we remain confident that a well-diversified portfolio can weather the ever-changing market.
First Quarter 2019 Returns5
Returns shown in the chart above are for first quarter 2019.
U.S. equities posted strong returns across segments this quarter. U.S. large-cap stocks, represented by the S&P 500 index, were up 13.6%. Large cap growth stocks, represented by the Russell 1000 Growth Index (+16.1%), outperformed value stocks (Russell 1000 Value Index, +11.9%). Small cap stocks, represented by the Russell 2000 Index, posted a 14.6% gain, outperforming large cap stocks. Within the small cap segment, value stocks (Russell 2000 Value Index, +11.9%) underperformed growth stocks (Russell 2000 Growth Index, +17.1%).
After some strong headwinds in international developed and emerging markets stocks last year, both generated sizable gains this quarter. Despite uncertainty around Brexit, international-developed stocks, represented by the MSCI EAFE Index, were up 10.6% in local currency terms and 10.0% in USD terms. Currency movement had minimal impact on international returns for U.S. investors in the first quarter. Emerging markets, represented by the MSCI Emerging Market Index, was up 9.8% in local currency terms and 9.9% in USD terms as investors became more hopeful for an easing of trade tensions between the U.S. and China.
World Asset Classes6
Returns for the First Quarter
On the fixed-income side, the Federal Reserve has put the brakes on rate hikes and signaled that there will likely be zero rate increases in 2019 and only one in 2020. The benchmark federal-funds rate is expected to remain in the current range between 2.25% and 2.5% for the time being. The yield curve continued to flatten this quarter, with part of the curve inverting. Since the end of 2018, the two-year Treasury yield fell from 2.48% to 2.27%, and the 10-year Treasury yield fell by less, going from 2.69% to 2.41%. As yields fall, bond prices rise. The Bloomberg Barclays Aggregate Index, representing investment-grade U.S. bonds, gained 2.9% for the quarter. Municipal bonds, represented by the BBgBarc Municipal 1–10Y Index, also had a strong quarter, gaining 2.2%.
Emerging markets bonds continued strong performance with the JPM GBI-EM Global Diversified Index (UH), representing local currency bonds issued by emerging-market governments, returning +2.9%. The optimism in the equity market positively impacted the high-yield bonds segment (ICE BofAML BB-B US CP HY Index), which posted the best performance in fixed income, ending the quarter 7.3% higher.
After the year-end scare in 2018, investors are likely relieved by the market rebound. The lesson in this is the difficulty of predicting short-term market movements and the benefit of taking a disciplined long-term investment approach. It allows your portfolio to ride through ups and downs. There can be unsettling moments along the way, but when market noise is loudest, other investors are panicking and you have that familiar unsettling feeling, it is more important than ever to remind yourself to remain steadfast in your portfolio strategy. Whether it’s a bull market or a bear market, if you remain disciplined in your investment strategy, both can be your friends.
U.S. Stock Market: Russell 3000 Index
International-Developed Stocks: MSCI EAFE NR Index
Emerging-Markets Stocks: MSCI EM NR Index
U.S. Bond Market: Bloomberg Barclays Aggregate Index
Emerging-Markets Bonds: JPM GBI EM Global Divers TR Unhedged
Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only. Indices are unmanaged. It is not possible to invest directly into an index. Any charts and graphs represented herein are for informational purposes only and cannot in and of themselves be used to determine which securities to purchase or sell, or when to purchase or sell securities.
Source for all return data: ©  Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.