It's been a fabulous start to the year for investors — as long as you ignore all those simmering worries about a possible recession.
The S&P 500 on Friday closed out its best quarter in nearly a decade, having jumped 13.1 percent through the first three months of 2019, and many other investments from junk bonds to foreign stocks have also bounced back from their dismal end to 2018. But the returns would have been even better if not for concerns that slowing growth around the world may drag down the U.S. economy.
The quarter's twists are just the latest for the markets, which have yo-yoed from record heights to fear-induced sell-offs for more than a year.
The big swings have left stock and bonds looking fairly valued, said Frances Donald, head of macroeconomics strategy at Manulife Asset Management. She's optimistic markets can keep climbing this year, but she anticipates more swings along the way. When she talks with big institutional investors, the mood is usually one of nervousness, she says.
"The 2020 recession calls, whether they're right or wrong, have permeated all individual investor mentalities," she said.
The Fed was again one of the market's main drivers, and it flipped to hero from antagonist in the eyes of many investors.
As last year was closing, investors were worried that the Federal Reserve would raise interest rates too quickly and choke off the economy. The central bank raised short-term rates in December for the seventh time in two years, and the S&P 500 fell more than 19 percent from late September through Dec. 24, nearly taking down the longest bull market for U.S. stocks on record.
But on Jan. 4, Fed Chairman Jerome Powell told a conference for economists that the central bank would be flexible in deciding when to raise rates. It was an immediate balm for investors, and the S&P 500 leaped 3.4 percent that day. It kept climbing until hitting a peak on March 21, the day after the Fed said that it may not raise rates at all this year.
All the while, companies were turning in yet another round of blockbuster profit reports aided by lower taxes. Earnings per share for S&P 500 companies surged 13 percent during the last three months of 2018 from a year earlier, led by big gains for energy and communications companies.
But the momentum for stocks stalled last week when a surprisingly weak report on the European economy and other worries triggered concerns about the global economy. Investors sought the safety of bonds, and that in turn triggered the alarm on one of the market's more reliable recession indicators.
Investors drove the yield for the 10-year Treasury lower than for the three-month Treasury bill for the first time since a little before the Great Recession. Such an "inverted yield curve" does not have a perfect track record as a recession predictor, but it has preceded each of the last seven by a year or two.
Here's a look at some of the moves that shaped the last quarter for investments:
— STOCK FUNDS SOARED
During the fourth-quarter swoon the S&P 500 fell as much as 19.8 percent from its all-time high set Sept. 20. The Fed's pledge for patience helped the index rally back to within 2.6 percent of the peak this quarter.
Technology stocks again did much of the work, but the gains were widespread. Funds specializing in small stocks or large, energy companies or real estate, all logged gains. The SPDR S&P 500 ETF retuned 13.6 percent for the quarter, including dividends, for its best return since the third quarter of 2009, when the economy was first crawling out of the Great Recession.
Stock funds that focus on high-growth companies, such as tech, again easily bested their counterparts that look for low-priced stocks, called value funds. Value stock funds trailed partly because they often have lots of banks and other financial stocks, which lagged during the quarter on worries that lower interest rates and slower economy will hurt their profits.
— BOND FUNDS CLIMBED AS YIELDS FELL
Inflation is still low, the Fed is holding the line on interest rates and worries are rising about the strength of the economy. All those help push up prices for bonds, and pull yields down, and bond funds of all types powered to gains during the quarter.
The iShares Core U.S. Aggregate Bond ETF returned 2.9 percent for its best performance in three years. It tracks an index of investment-grade bonds, and it benefited from a drop in the yield on the 10-year Treasury to 2.41 percent from 2.68 percent at the end of the last quarter.
— WHAT'S AHEAD?
Like the global economy, growth is also slowing for U.S. corporate earnings. Analysts say first-quarter profits likely fell nearly 4 percent from a year earlier, according to FactSet. If they're right, it would be the first decline in nearly three years. That's setting the stage for some potentially disappointing reports when the next quarter opens on April 1.
So, investors may want to ready themselves for even more turbulence in the coming quarter. Besides earnings reports, they'll also be getting more clues about the strength of the global economy and whether the United States and China can make progress on their trade dispute to help the global outlook.