Stocks continued to forge higher in February, frustrating many investors who expected stocks to follow their historical tendency and retest the low levels hit in late December. Instead, stocks of all sizes and shapes have marched consistently higher in 2019.
In the chart below, which plots the prices of the S&P 500 index over the past year, you can see that stocks clearly remain in a year-long trading range framed by the highs hit in January 2018 and the lows hit in February of that year. (The horizontal lines show support and resistance levels as the S&P has risen and fallen.) Trading ranges are periods of transition for stocks, which means we can’t determine whether they will ultimately move higher (into a new uptrend, resuming the pattern from 2009) or lower (into a new downtrend or bear market). We need patience while the market absorbs the various economic and market data.
A number of cross-currents help explain why stocks have remained in this trading range, neither rising very much nor selling off very much.
- Federal Reserve actions
- Signs of a global economic slowdown
- A China-U.S. trade war
Investors were relieved when the Federal Reserve indicated that it had no plans to further increase interest rates and would do so only in the face of a strengthening economy. This was seen as good news by the markets. Somewhat ironically, economic data has been weakening a bit. In 2018, GDP (the measure of overall economic growth) slipped from 3.4% in the third quarter to 2.6% in the fourth quarter. Estimates for first-quarter GDP this year are coming in below 2%. This is a worrisome trend for investors to watch closely.
And of course, the final issue hanging over the markets is the trade war between the U.S. and China. While both sides claim that progress is being made and the tone suggests a deal will be reached, markets will remain on edge until something more certain is announced.
In line with our standard procedures, we have been prudently reinvesting the FSA portfolios as stocks have recovered their losses. In the table below, you can see how the six strategies are invested as of the end of February. In general, in the equity-oriented strategies, we brought down the money market allocation from roughly 60% to 30% in February. Given the current levels of stocks, we expect that progress in the weeks and months ahead could be choppy as stocks attempt to break to new highs. But if stocks continue climbing towards and above their previous highs, we will restore the portfolios to their fully invested positions.
Ron Rough, CFA
Director of Portfolio Management
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