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First Quarter 2019

After a horrific conclusion to 2018, the equity markets posted strong returns in the first quarter of 2019.

The consensus is that the majority of the volatility in the fourth quarter was attributable to the rising interest rate environment. The Federal Reserve got the memo – recent language from the Fed is decidedly more dovish. As a result, expectations for another rate increase at the May 2019 Fed meeting have all but vanished. The proverbial “punch bowl” reappeared at the stock market party as domestic and global stocks posted the strongest quarterly returns in years:
Probability of Rate Hike in May 2019 Global Asset Class Returns: Q1 2019
In our last letter, we noted that the year-end equity declines would provide us with some attractive buying opportunities. Well, we added General Mills (the consumer staple stock that makes cereal) to our focus list. It is not a name likely to impress the average Millennial, but with a divided yield approaching 5% at the time of purchase, we like it.
Brexit
Prime Minister Theresa May is now officially a candidate for the Southwest Airlines “Wanna get away?” advertising campaign.
The outcome continues to be a moving target marred with continuous delays about how to exit the EU efficiently and with the least disruption. Clearly, this has proven to be a case where “the devil is in the details”; we have no more clarity around Brexit today than we did 3 months ago. While this is a less-than-desired outcome, there is a potential silver lining: if no deal can be approved, a no Brexit is possible.

A major impediment to the deal relates to the complicated history between Northern Ireland and the UK. The current version of Brexit includes what has been termed the “Irish backstop”. This backstop is an insurance policy against an economic border around Northern Ireland. If the Irish backstop were removed then Northern Ireland would be treated the same as the UK. This is where many in the government vote along party lines, meaning treating Northern Ireland the same or different from the UK is a significant identity to the associated parties.

We believe the best possible outcome would be for another referendum that overturns the initial vote to exit. Such a development would most likely lead to a rally for European equities, particularly financial stocks.
Venezuela

Our Venezuelan friends to the south remain a country mired in poverty and hyperinflation due to past policies of Hugo Chavez and disputed current president Nicolas Maduro (who controls the military). Currently, the country is in a battle with Maduro and Juan Guadio (with international backing). Guadio appointed himself interim president.
While economic data from the country is erratic, a few things are clear: power outages continue to affect the country and hyperinflation has made the local currency worthless. Venezuela has defaulted on its debt, experienced a forced migration of 3 million people while oil production – the only crown jewel of the country – has fallen to 600K barrels a day from a peak level of 3.3 million barrels a day in 2003.

The latest data of 2017 puts Venezuela at the top of the proven oil reserve list in the world, however with “brain drain” migration, limited power supply and worthless currency, the ability to tap into the oil growth engine remains a monumental task. Additionally, North America and Argentina continue to grow their cheap shale production. Venezuela has been the unwilling participant in the OPEC production cuts over the last few months as the problems in the country have lowered production. In the near-term, Venezuela will continue to suffer negative impacts of past policies. Another wrinkle to the Venezuelan crisis involves Russia’s desire to insert itself at the worst possible time.
Outlook
The S&P 500’s annualized 10-year total return was 15.92% as of March 31, 2019. While we are no different in our inability to predict the market’s future return, we are virtually certain of one thing: the next ten years will not be as good as the previous ten. Corporate profit margins are at all-time highs and low interest rates (since the Great Recession) enabled publicly traded companies to borrow cheap money to re-purchase its stock. In short, it was a perfect scenario for equity investors. While markets could certainly rally through the summer, we are more directionally skeptical about equity returns over a 2-3 year horizon.
Annualized Rolline 10-Year Return: S&P 500
In conclusion, our approach to constructing well-diversified portfolios with an emphasis on “downside protection” should continue to yield favorable outcomes for our clients. The bank continues to invest in the Wealth Management Group to support our human capital and technology needs. Please do not hesitate to reach out with any questions.
Go Sox!
Carl R. Hall, CFA
Chief Investment Officer

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