Pennsylvania Trust

1st Quarter 2019 Commentary

1st Quarter 2019 Commentary

Photo of Jon HeckscherBelieve it or not, March marked the 10th anniversary of the market’s low point during the Great Recession (S&P closed at 676.53 on 3/9/2009). A decade after the financial crisis, memories are fading but that period of turmoil permanently altered the U.S. economy, the financial system and investor psyche. The recession, the worst since the Great Depression, wiped out nearly $8 trillion in stock market value between 2007 and 2009. At home, Americans lost nearly $10 trillion in net wealth as home values plummeted, unemployment levels breached 10% and retirement accounts evaporated.

While breaking the record for duration, the ensuing, ongoing “bull market” we have been enjoying has persisted for ten years, all the while coping with the “bears” given global trade conflicts, European debt crises, Brexit and our own unsettled political landscape, to name a few of the challenges. While successfully climbing a “wall of worry,” the equity market has once again proven its resilience; losses experienced in 2009 were fully recovered within four years. The S&P 500 has returned 17.8% annually in this record-breaking decade; the technology-driven NASDAQ has averaged 21.1% per year over the same period.

The economy has also staged a steady comeback, adding over 21 million new jobs (U.S. Employees on Nonfarm Payrolls) while the unemployment rate has dropped to a 50-year low of 3.8%. In addition, wages have more recently started to grow at a pace closer to historical averages. As a result, average household net worth has climbed from a low of $57,000 (in 3/2009) to $104,000 (in 12/2019) representing a 6.4% annual gain. (

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The resilience of the markets was once again on display in the first quarter of 2019. Following a sharp decline in December, the S&P 500 rebounded 13.7% while the NASDAQ grew 16.8% representing its best first quarter performance in ten years. While the Technology sector led with returns of almost 20%, bond proxies (Real Estate, Consumer Staples and Utilities) gained momentum in late March as interest rates fell. Small- and mid-sized stocks outperformed larger companies as they had suffered more in the fourth quarter. The international markets also had a strong quarter as both the MSCI EAFE Index (developed markets) and the MSCI Emerging Markets Index were up nearly 10%.

We believe the performance can be attributed to a bounce from oversold conditions in December, improving expectations for a trade deal with China, and a more dovish posture by the Federal Reserve. While the equity market moved higher in a linear direction, bond alarms sounded as the yield curve inversion extended further out to the 10-year bond (versus the 3-month Treasury bill) for the first time since 2007. This warning caused the yield on bonds to retreat to the lowest level in 15 months resulting in a positive return for bonds for the quarter (+2.9%). While volatility briefly spiked in March, all major asset classes ended the quarter higher.

The most significant development for markets this quarter was the Fed’s pivot (an abrupt change in policy) from projecting further gradual rate hikes to adopting a patient, wait-and-see attitude, as well as signaling that they will delay any further shrinking of their balance sheet in September. As Fed officials have explained over the past few months, the pivot was triggered by three factors: tighter financial conditions in the fourth quarter, an accelerated slowdown in global growth, and the lack of pricing power on consumer goods despite the 50-year low in the unemployment rate.

We expect inflation pressures to remain subdued despite a relatively strong labor market. As a result of the Fed’s easier monetary position, we expect a sustained period of growth later this year following a soft first quarter. As such, we believe the Fed funds rate will stay at the current level for the foreseeable future and believe any hikes or cuts will face a relatively high hurdle.

Looking forward, we feel three main themes will dominate both headlines and the markets: Earnings, Policies, and Rates.


While the first half of the year may be softer, we expect the S&P 500 to continue to produce positive earnings as steady economic growth combined with increased productivity and a resolution to the trade dispute should help generate solid corporate profits. Revenue tends to be highly correlated to GDP plus inflation which could allow for earnings to exceed the 3% to 4% growth rate currently forecasted (FactSet Consensus) even if profit margins shrink slightly. This result would be modestly positive for equities and modestly negative for bonds.


Considering the limitations to monetary policy now that the Fed has paused (and announced the end of the balance sheet wind-down), we expect fiscal policy to take the lead and help extend the economic cycle. In doing so, we also believe the risk of a Fed policy mistake has diminished.

A successful trade resolution (aka trade policy) will allow the full extent of the Tax Cuts and Jobs Acts of 2017 to take effect as some of the roughly $700 billion in repatriated profits migrates into long-term business investment. This should be boosted by lower taxes now felt by both corporations and individuals. This result would be a catalyst for equities.

One less publicized policy is closer to home. The now-in-question United States – Mexico – Canada Agreement (USMCA) will likely remain a policy issue for the coming months as the U.S. House Democrats, in addition to a few of their Republican colleagues, have expressed concerns about the deal. While this agreement will have less of an impact on the stock markets compared to the outcome of our negotiations with China, the longer the talks remain unresolved, the less likely affected businesses will commit to capital expenditures.


Tight labor markets, low Fed funds rates and steady wage growth should gradually increase long-term interest rates and normalize the yield curve. In addition, lower rates in Europe (due to soft economic conditions) will keep a ceiling on U.S. rates. If our economy outperforms the Fed’s relatively gloomy forecast, both the odds of a rate hike and an increase in the 10-year yield, will rise, giving the Fed room for a hike in late 2019 or early 2020. This result would be modestly positive for the equity market and negative for the bond market.


While Spring is a time of regeneration and optimism, we need to recognize concerns over slowing global growth, BREXIT, corporate earnings, and multiple trade risks. Although investors have reason to be optimistic, we cannot rule out temporary earnings contraction. That said, we do not see an economic recession on the immediate horizon. We expect the higher-profit lower-beta nature of U.S. equities to lead to continued outperformance over the international markets. Although the torrid pace of gains seen in the first quarter is unlikely to continue, we feel that the combination of a stable GDP and improving corporate profits should continue to move the markets forward.

The second quarter will likely be driven by trade negotiations now that the risks of a Fed policy mistake have been significantly reduced. As the year progresses, the Presidential election cycle should also pick up steam which is apt to be the driving theme of the markets into 2020.

We believe 2019 should continue to be a good year for investors, albeit with expected volatility, as the markets now trade at reasonable valuations and the economy and earnings are still growing (though more slowly). The turnaround in market performance experienced in the aftermath of 2009 and more recently in the past quarter reflect the resilience of our financial markets. We will be closely monitoring events as they develop but urge clients to remain focused on their long-term goals.

We would like to thank you for your relationship and interest in following our thoughts. We wish everyone a happy Spring and encourage clients to contact their portfolio manager with any investment questions, concerns or perspectives as 2019 unfolds.

You may reach us at 610-975-4300, or email

Mr. Heckscher is Senior Vice President, Director of Fixed Income and Chief Investment Officer of Pennsylvania Trust.

Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome — including performance — is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.