Coming off a profoundly negative and volatile fourth quarter, market sentiment reversed course with a vengeance for the first quarter of 2019. Better than expected global economic news, and muted inflation expectations served to boost asset prices across a wide range of investment categories. Large-cap stocks in the S&P 500 index gained 13.7% in the first quarter, erasing the sharp loss from the previous quarter. Stocks of smaller companies, represented by the S&P SmallCap 600 index also did well, posting a gain of 11.6% for the first three months of the year.

International stock markets also did very well, with the MSCI Europe, Australasia, and Far East (EAFE) index gaining 10.0% for the first quarter. Unlike the previous quarter, investors showed renewed optimism about the trade negotiations between the U.S. and China, and global growth remained solid.

Bonds posted their best quarter since the beginning of 2016. The Bloomberg Barclays U.S. Aggregate Bond Index  gained 2.9% in the first quarter, benefiting from a more accommodating outlook on future interest rates from the Fed.

The Financial Engines perspective.

Once again, markets surprised with a sharp turnabout in investor sentiment. What does this tell us? Predicting the future is difficult. New (and unexpected) information can change market expectations quickly. A new narrative around U.S./China trade negotiations, and a chastened Fed taking a more relaxed view on future interest rate changes helped put investors into a more positive mindset. A diversified portfolio once again delivered strong performance in the first quarter. The last two quarters have demonstrated that markets can be unpredictable, and that maintaining a consistent diversified allocation is the best strategy to deal with the uncertainty.

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