Best Quarter in 21 Years for the S&P 500

U.S. markets rallied again on Friday as more positive trade talk prompted heavy buying across the board. All major indexes traded higher. The S&P 500 posted its best quarterly performance since 1998. It's hard to believe that U.S. stocks were down 18% from their highs as of Christmas eve, but they were, and now they are back. Here's the SPY ETF, up 16.2% year-to-date.

We can thank the Fed for the rally, and some would say we can blame it for the 2018 selloff. Regardless, keeping interest rates in the 2.25-2.50% range for the foreseeable future is great for stocks, great for the U.S. housing market and great for consumers carrying debt. It's not great for savers or people living on a fixed income since they will earn less through their savings accounts or fixed income investments, but that is the trade off. 

But this Feels Weird...

We are living in a peculiar time in financial history when growth is slowing, corporate profits are falling, but the U.S. stock market keeps rising. The bond market is telling us through lower yields that growth is slowing and it looks particularly sluggish in the next 3 to 12 months. But stocks keep marching higher on rumors of a trade deal and the promise of low interest rates. When interest rates are historically low, as they are now, there is an acronym we like to use called "T.I.N.A". That's short for "There is no Alternative". In this environment, investors looking for returns are only finding them in the stock market. (P.S. European markets have also had a terrific quarter. James has more on that in our chart of the day.)

 Add to that the increasing volume of stock buybacks, which boost corporate share prices, and we wind up where we are...with stocks near record highs in the face of slowing growth. Chart from Birinyi & Associates and Bloomberg.

Lyft-Off

The ride-sharing company finally went public today (I've been waiting all week!) and investors greeted it with a thumbs up. Shares popped more than 20% when trading opened, but settled back to a modest 8.7% gain. 

 Lyft is the first of the 21st century 'unicorn stocks' to test the public markets, and it picked a good day to do it. As we've mentioned, more than half of IPOs trade lower six months after their initial public offering. There are a few reasons for that, but one worth remembering is that IPOs are subject to a lock up period, in which insiders cannot sell their shares until six month after their debut. 

 Lyft has some high-octane shareholders who have backed the company over its 7 year history. In addition to its founders, who control 40% of the voting shares of the company, its backers include the following:

  • Rakuten, the Japanese e-commerce giant: 13% 
  • General Motors: 8% 
  • Fidelity Investments: 8%
  • VC Firm Andreesen Horowitz: 6%

They are going to want to get paid for their investment and their patience.

What's Next

Now that Lyft has braved the public markets, expect the rest of the LUPA stocks to do the same. That's Lyft, Uber, Pinterest and AirBnB. They won't be the only ones to do so. Expect Slack, Palantir and Postmates to also give it a go in the near future.

Brexit is Broken

Friday was the day that the U.K. was going to leave the EU. But, as we know, that's not going to happen. Members of the U.K. Parliament rejected Prime Minister Theresa May's withdrawal agreement for the third time by a wide margin. This means the U.K. has missed a deadline to delay Brexit until May 22nd and leave the EU with a deal. May has until April 12th to seek a longer extension and avoid what is known as a 'Hard Brexit', which would mean leaving the EU without a deal in place.

 What to Expect Next Week

Here's a quick look at the economic calendar for next week in the U.S., highlighted by the Jobs Report on Friday:

 Monday: Retail Sales and Construction Spending for February. Consumer spending and evidence of strength in the housing market will be key to retaining economic momentum in the U.S.

We'll also get two purchasing manager reports out of China on Monday, which will shed some light on the depth of the slowdown in that country.

 Tuesday: Durable Goods and Motor Vehicle Sales. Auto sales have been declining in the U.S. over the past several quarters, but usually pick up as we head into the Spring and Summer seasons. No one, particularly the U.S. automakers, thinks that auto sales will ever return to the 18-20 million per month days of the early part of the 21st century, which us why Ford has said it will stop making cars altogether, except for the Mustang and Focus Active. But auto sales are a leading indicator for lending. Now that interest rates are falling, especially for mortgages and auto loans, we could see a pick up in activity.

 Friday: The U.S. Non-Farm Payrolls Report, aka the Jobs Report. This will be 'one to watch', given the surprisingly low February numbers. February could've been a monthly aberration, or it is a sign that companies really are tightening their belts in anticipation of a real slowdown. 

The corporate front will be relatively quiet as companies literally go into a 'quiet period', as they prepare their quarterly earnings reports. Earnings season will kick off in the second and third weeks of April. The quiet period also means no stock buyback announcements, which have been on the rise this quarter.