by Steve Conard, CFP®
Financial markets continued to move higher in the 2nd quarter of 2019, albeit at a more tempered pace than in the prior quarter. All major asset classes participated in the rally; US and foreign stocks as well as bonds – both investment grade and junk – posted solid gains during the period. US equities as measured by the S&P 500 Index are now up 18.54% year-to-date after losing 4.38% in 2018. The Bloomberg Barclays Aggregate Bond Index finished the first half of the year up 6.11%.
The Federal Reserve Board’s signal to halt its planned 2019 interest rate hikes ignited the market rally as the year began, but Wall Street traders clearly expect the Fed to go even further. Treasury futures prices currently reflect the expectation of two quarter-point rate cuts over the remainder of the year. Mr. Market seems to view the global economic outlook in a more pessimistic light than the Fed, which has continued to downplay suggestions of impending recession in the domestic economy while acknowledging some signs pointing to slowing growth.
Wall Street’s economic jitters continue to focus around trade tensions with the Chinese, who (not surprisingly, in our view) reneged on agreements they had made in earlier negotiations. This issue was the source of a recent soft patch in global equity markets, and remains the primary threat to the global economy near term. While the two sides continue to negotiate, a quick resolution could be elusive given the complexity of the issues involved and political considerations that could complicate matters as the US presidential election cycle moves into high gear.
By the numbers, as of the market close on June 29th the S&P 500 Index gained 3.81% in the 2nd quarter, ahead of the Dow Jones Index gain of 2.59%. The technology-heavy Nasdaq 100 Index rose 3.58% in the quarter, continuing to pace US markets with a year-to-date gain of 21.33%. Foreign equity markets continued advancing as well, with the MSCI EAFE index of developed markets rising 3.96%. The MSCI EM index of emerging markets equities added just .83% in the quarter, weighed down by trade concerns and the related weak commodities markets.
As we move into the 2nd half of the year, our attention will be focused intently on whether the Fed determines that the US economy actually needs the lower interest rates that Wall Street is now demanding. It is noteworthy that equity markets are now trading higher on negative economic news, and lower on positive data – a condition usually accompanied by volatile markets swings. In this environment, if the Fed fails to cut interest rates, we expect Wall Street will respond with a flurry of selling. Stay tuned.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk including loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets. The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds. The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors. The MSCIEAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCIEAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK. The MSCIEM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCIEM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa.Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.