Second Quarter 2019 Market and Economic Review
During the second quarter, financial markets continued to respond favorably to a variety of external factors.
The S&P 500 index, which tracks large U.S. companies, reached all-time highs during the last half of June. While record corporate profits and strong U.S. economic numbers were drivers of the rally, the high marks were also reflective of news that the Federal Reserve would take a less aggressive approach on normalizing monetary policy, a change from its previous stance. In June’s public statements, the Fed gave itself room to take measures to help the economy if the need arises, which helped fuel a rally in bonds in the second quarter.
Small companies have also continued to rally from the late 2018 downturn. The Russell 2000 index, which tracks small U.S. companies, ended the second quarter up 2.10%. Almost all stock indices were characterized by a good April, bad May, and good June.
Similarly, nearly all international markets have continued their early 2019 rallies, except China and a few smaller countries.
In early May, Chinese and U.S. trade talks broke down in the eleventh hour after months of optimism. During the breakdown, U.S. trade representatives accused Chinese officials of attempting to walk back key elements of the deal and in response put tariffs on $200 billion of Chinese goods. The MSCI China Index is up 12.79% year-to-date but down 4.30% for the quarter. President Trump and Chinese President Xi Jinping met on June 28-29. No final trade deal was reached, but each agreed to continue talking and to try to “deescalate” the tone of negotiations, to which the market responded favorably.
In Europe, most markets were up for the quarter. European investors continue to watch the Brexit development, automobile industry trade talks with the U.S., and the outcome of the Iran deal given recent conflicts in the Strait of Hormuz.
Looking at U.S. bonds, yields continued to fall in the second quarter. In early April yields fell on a missed employment report, and yields were down slightly ahead of the meeting between Trump and Xi.
* Each benchmark is allocated based on assumed Risk Profile of underlying indexes.
**Benchmarks include a mixture of ICE BofAML US 3-month Treasury Bill Index, Barclays Global Aggregate Bond Index, Barclays US Aggregate Bond Index, MSCI EAFE Index, and the Value Line Composite Index (Geometric). These benchmarks are the same benchmarks as those in the Risk/Return and Account Analytics sections of client quarterly performance reports. By comparing your portfolio’s return to the benchmark with the closest risk/return characteristics, you get a more accurate reading of portfolio performance than using a less diversified benchmark, such as the S&P 500 index.
The U.S. economy grew in the first quarter of 2019 at 3.1 percent, the strongest first quarter growth since 2015. Higher exports, lower imports, and household consumers contributed to the increase.
In June’s public statements, the Federal Reserve did not make any changes to monetary policy. However, they left themselves room to take measures to help the economy as a nod to those who are concerned about the economic outlook or trade renegotiations.
This position was a significant departure from their last two quarterly meetings, and investors saw these most recent comments as increasing the odds of intervention. Market futures have priced in multiple interest rate cuts during 2019, which may be optimistic as the Federal Reserve members currently project zero remaining interest rate changes in 2019.
Regarding trade, the White House is involved in trade negotiations on multiple fronts with China, Europe, and Canada/Mexico. These talks have created a positive potential to re-visit trade relationships that are not optimal for the U.S. However, it has also created an abundance of business uncertainty and has disrupted global supply chains.
At the time of writing, U.S. consumers have not been “casualties” of the “tariff war” in the form of higher import prices on consumer goods. While the cost of specific imported products like washing machines increased early on, data from the Bureau of Labor Statistics show that import prices across the board decreased 1.1 percent from May 2018 to May 2019 (including fuel) and are essentially flat over the last two years. In the future, these tariffs may lead to higher prices as cost increases work themselves through the supply chain or as additional tariffs are possibly levied; however, that has yet to occur.
We will continue to monitor the impact of tariffs and interest rates as we structure and monitor our clients’ portfolios.