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On Point

May 2019

May Off to a Volatile Start

The stock market extended its strong year-to-date gains through April with the S&P 500 and Nasdaq Composite reaching new all-time highs, reflecting strong economic confidence, and possibly some overconfidence, with May now off to a volatile start. The Information Technology sector has continued to lead the charge, but Industrials actually posted their strongest opening four months in at least thirty years, in spite of the troubles at Boeing, the largest company in the sector. A solid rebound in bank stocks through April also indicated confidence in the continuation of the economic expansion.

However, hints of excessive optimism have cropped up. One has been the recent flurry of high-profile, highly-unprofitable IPOs, loosely-billed as tech. One popular derivative bet against volatility has reached a new high in aggregate size. And regular assurances of progress on a trade deal with China may have fostered excessive complacency around that risk, although the situation is still developing.

More generally, prices have outpaced fundamentals this year, though this is measuring from the fear-filled end of 2017, a tough comparison. Economic growth continues to look a little slower compared with last year but has held up well enough so far, as have corporate revenue and earnings. Valuations have risen as mentioned, but mostly remain within historic norms given current profitability. Inflation remains very moderate in spite of the remarkably long economic expansion, which has prompted a patient interest-rate policy and led the bond market to rally alongside stocks. This dynamic hearkens back to the Goldilocks days of 2017 and their sharp end in 2018, reminding us that risks rise with expectations.

"S&P