Through the Rain
One of the significant attributes of humans is irrationality. It is both an aid and an anathema to investors. Without this irrationality, it would be close to impossible to generate excess returns, and without it, losses would also be less likely. Therefore, market volatility is part of our human condition.

In the first quarter, equity markets reacted like they were shot out of a cannon as opposed to being squeezed out of a tube. Returns for first quarter 2019 were the best quarterly returns experienced in the last 10 years. Domestic markets, using the S&P 500 as a proxy, rose 13.7%, while international markets, using the MSCI All Country World Index ex USA, advanced 10.7%.All domestic and international sectors saw positive performance over the period. Performance was led by the information technology sector. This positive contrasts with the negative equity returns exhibited during 2018. Year-over-year, domestic and international markets are up 9.5% and 2.6%, respectively.

Why have markets behaved so well this year?
For the most part, it looks like investors are shrugging off the “macro” and focusing on the “micro.” Trade tensions have been a gloomy storm cloud since 2017. As residents of the Pacific Northwest have shown us, you can’t just stay at home because of rainy weather. You put on a raincoat, grab your umbrella and go about your day. That is what happened in the markets this quarter. Investors put on their raincoats, got out there and focused on companies. And they saw companies are growing.

In fourth quarter 2018, earnings grew 16.9% and sales increased around 5%. We have seen consistent earnings growth since the end of the financial crisis. Since 2010, they have grown by an average of 12%. Over the same period, sales have grown by 5.5%. While these rates of growth may not be maintained in 2019, a slowdown in earnings growth should not be interpreted as a sign companies are not doing well. Earnings are expected to continue to grow, albeit not at the accelerated pace previously seen.

Will the market’s good behavior continue?
The first quarter is an example of slowing earnings growth as results are actually expected to come in flat to slightly negative relative to the prior quarter. The energy sector is expected to be the largest detractor in the quarter. This is despite the expectation that sales for U.S. equities are expected to grow by 5.1% versus the prior quarter. Earnings growth for all of 2019 is expected to be positive, with a current projection of 3.4%.

While earnings growth is decelerating, we feel a more accommodative Federal Reserve and improving level of economic growth will provide a positive backdrop for equity investors.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates, FactSet.
The information provided has been obtained from sources deemed reliable, but BTC Capital Management and its affiliates cannot guarantee accuracy. Past performance is not a guarantee of future returns. Performance over periods exceeding 12 months has been annualized.

The information within this document is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. Statements in this report are based on the views of BTC Capital Management and on information available at the time this report was prepared. Rates are subject to change based on market and/or other conditions without notice. This commentary contains no investment recommendations and you should not interpret the statement in this report as investment, tax, legal, and/or financial planning advice. All investments involved risk, including the possible loss of principal. Investments are not FDIC insured and may lose value.