U.S. equities rebounded in the first quarter, with both large cap and small cap averages posting double-digit gains.  The strong quarterly performance for stocks should be taken into context – i.e., the sharp drawdown in equity prices during the fourth quarter resulted in a low starting point to begin the year.  While conditions are likely not as good as they seem at present, they were clearly not as bad as price levels indicated in December.  As we entered the new year, investors were emboldened by a combination of compressed valuations relative to expected profit levels and a more constructive macro backdrop.  On this latter point, two notable positives in the quarter were signs of progress on the trade dispute between the U.S. and China, as well as a pivot by the U.S. Federal Reserve from continued tightening to a more accommodative posture.  While the market was in flux during late 2018 about the number or rate increases the market may have to digest in 2019, a holding pattern may be the more likely course of action for the balance of the year (with some thinking the next Fed move could be a cut in rates, vs. a raise).

Although equity returns in the aggregate were positive for the quarter, there was a notable differentiation in performance on a style basis.  In what has become a recurring theme in recent years, growth stocks outpaced their value counterparts by a wide margin in 1Q – over 400 basis points for large-cap stocks, and a 500+ basis point differential within small caps.  While these style-driven environments tend to self-cancel over time, the below graph illustrates that the duration and magnitude of the current cycle has certainly made it a more challenging investment environment for value practitioners.  The rotation to growth in the quarter was in part driven by a perceived decline in growth expectations, as expressed by the decline in the 10-year U.S. Treasury yield.  A decline in yield is often associated with a general scarcity of growth, and thus the premium assigned to growth stocks (vs. value).

Is the longest-running bull market on record back on solid ground?  In Cambiar’s opinion, 2019 has the potential to be a good year for equities, although the path may be a bit bumpier relative to the smooth sailing witnessed in the first quarter.  The S&P 500 Index currently trades at a one-year forward P/E of 16.4x, which we view to be fairly valued. The one caveat is the potential for a downward revision to the denominator once the upcoming earnings season concludes – which would correspond to a more expensive market.  Valuations within the small-cap asset class are somewhat extended, and the Fed’s pause in further tightening provides a lifeline of sorts for the many non-earners/high leverage participants that reside within this segment of the market.  Regardless of market cap, the Cambiar team remains focused on identifying structurally advantaged companies that have a record of value creation and possess an attractive reward-to-risk profile over a forward 1-2 year time horizon.