June 2019 Market Commentary
NO RECESSION = NO BEAR MARKET
In Q4 of 2018 we experienced the worst performance in any Q4 since the Great Depression (Source: FactSet). In Q1 2019 we had the best start to a year in decades. Since then the markets have pulled back, bringing us to where we are now. The question on everyone’s mind is: “Are we headed into a recession?” Our take is that we are not and here’s why.
In our previous October 2018 commentary we argued that we were not going to see a recession in 2019. We based this on the fact that corporate earnings were continuing to rise. That said, our trend-following signal* went negative on November 3, 2018. So, what’s going on? It is our opinion that the market is still in a correction phase, as opposed to being in a bear market.
Market history tells us that the highest correlation to predicting recessions is declining corporate earnings. For Q1 of 2019 corporate earnings came in flat, verses 24.6% growth in Q1 of 2018. While early analysts’ EPS estimates for Q2 are coming in at negative 2.1%, keep in mind that companies have a tendency to beat analysts’ estimates (Source: FactSet). These same analysts are forecasting positive EPS growth for the remainder of 2019.
Ø Our resulting conclusion is that we are still in a correction, not a bear market. What does that mean to you? We continue to hold cash in portfolios, thereby maintaining a defensive posture.
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*Our trend-following signal is a momentum indicator that shows the relationship between two moving averages.
+ Past performance is not indicative of future results.