Quarterly Commentary – June 2019

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The second quarter saw U.S. Equities continue their upward move until the beginning of May where things took a turn lower and went down for most of May only to rebound in June back to the prior month levels. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 18.6% for 2019. The Dow Jones Industrial Average was up 15.4%. The Nasdaq Composite Index was up 21.3%. The Russell 2000 Index was up 17.0%. International equities as represented by the MSCI AC World Ex U.S. Index were up 13.4%. The MSCI Emerging Markets Index was up 10.6%. Fixed Income as represented by the Barclays Aggregate Bond Index ended up 6.1% for the year.

Volatility had been declining and bottomed out Mid-April then it has been slowly increasing since but not materially. So far this year the markets overall have done well on several fronts. U.S. Equities, International Equities and Fixed Income have made a relatively strong showing. If we consider the significant drop of December 2018, there is the impression that we have been spinning our wheels and not making much progress but that is how it works, in spurts. U.S. stocks are hovering near all-time highs as we close the quarter.

Trade and Fed Policy seem to dominate the conversation as it relates to the outlook for stocks. Other items to contend with in the backdrop are geopolitical tensions with Iran, North Korea and Venezuela. Concerns over slowing global economic growth, a slump in corporate earnings and that ever permanent worry about a looming recession are also part of the landscape. Then there has been added trade uncertainties with Mexico, Canada and the Eurozone. Regarding a comprehensive trade deal with China, it appears unlikely that this will happen in the near term. On the geopolitical front there could be military escalation with Iran, that is always a possibility. We always live and have invested in a world that is constantly under geopolitical pressures. Historically, the market reaction to some of these incidents has tended to be short and brief.

Some of the largest economies in the world, the United States, European Union and Japan are driven primarily by consumer spending and collectively these amount to more than half of the world’s economy. The high consumer confidence in these countries should indicate strength and resiliency but there are signs of confidence having peaked so despite what would appear to be a strong positive, this may be cause for caution. Global manufacturing has moved into contraction levels and world leading economic indicators are at a key recession threshold. Will central banks react appropriately and help avoid the next recession? As far as the U.S. Federal Reserve is concerned, the tone and signaling of the end of the current rate hike cycle and the hint at rate cuts moving forward has probably helped contribute to the stock market rally in the first half of 2019. Futures markets reflect the expectation of multiple rate cuts by the Fed and for one cut by the European Central Bank and Bank of Japan. Will this be enough to avert a slowdown? It appears that the Fed’s proactiveness stance at this juncture is a welcome change from the reactive approach of the past. The issue is we are at already low interest rate levels and much lower than were they were during previous recessions. Going close to zero again may force them to revisit the use of unconventional tools for stimulus. There is of course a risk to providing stimulus too quickly and trigger some overheating or financial market bubble. There is some wiggle room however since inflation remains well below the Fed’s Target.

We hope you are having an enjoyable summer and are thankful for the opportunity to serve you.