During the second quarter, the stock market rebounded from an early May swoon to add to the first quarter’s strong returns. The rebound was not based on actual economic trends as GDP slowed in the second quarter to 2.1 percent, down from 3.1 in the first quarter. Instead, the rebound put more expectations on finalizing a trade agreement with China and the Federal Reserve providing additional monetary stimulus through a rate cut.
The Broad U.S. stock market returned 4.1 percent in the second quarter. International Developed and Emerging Markets also garnered positive returns, up 3.79 and 0.6 percent respectively. The U.S. Bond market index was up 3.08 percent for the period. A globally diversified portfolio of 50/50 equities and fixed income returned 2.3 percent for the period and 8.82 percent year to date.
INTERNATIONAL – In U.S. dollar terms, the European contingent of Switzerland and Germany recorded the highest country performance in developed markets, both up more than 6 percent. In emerging markets, Greece and Russia recorded the highest country performance, up 23 and 16 percent respectively. Pakistan was the worst performer, down more than 21 percent. The U.S. was middle of the pack, returning 3.89 for the quarter.
FIXED INCOME – Anticipated rate cuts by the Federal Reserve once again helped to propel positive returns for Fixed Income holdings during the first quarter. The Treasury 10 Year yield fell by another 41 bps from 2.41 percent in March to 2.0 percent in June. Short-term corporate bonds gained 2.09 percent; intermediate-term corporate bonds 3.13 percent; and municipal bonds 1.98 percent during the quarter.
ALTERNATIVE INVESTMENTS – After being the top-performing asset class the last several quarters, REITs flattened out for the quarter with the U.S. REIT Index up a mere 0.8 percent. The Bloomberg Commodity Index declined 1.19 percent in the second quarter of 2019. Agriculture-related commodities provided a few positive performers (Corn, Wheat, Coffee), each up over 10 percent for the quarter; Natural Gas was the worst performer down 16.6 percent followed by Cotton down 14.7 percent.
SUMMARY – Economic cycles typically collapse when an area of excess investment collides with declining credit availability. We have witnessed recessions following excesses in energy, mortgages, internet and technology and Savings and Loans debt, along with declines in automotive and airlines.
Manufacturing often acts as a leading indicator for all business types and tends to signal the direction of corporate earnings growth. The widely watched global manufacturing Purchasing Managers Index has declined for 13 straight months and in May slipped below 50, indicating true contraction versus just a slowing rate of growth.
A June 2019 survey of corporate CFOs in the U.S. by Duke University noted that over 70 percent believe a recession is coming within the next 12 months. Debating the accuracy of the CFOs is less important than the actions these CFOs may take in response to their outlook – pulling back on hiring and business investment plans.
Warren Buffett’s favorite valuation measurement compares the total value of the stock market to the Nominal Gross Domestic Income. Going all the way back to 1925, the five highest readings of valuation (or over-valuation) were 1929, 1966, 2000, 2008 and today (2019), thus stocks are currently richly priced.
As we continually highlight in each Market Review, volatility is part and parcel of investing. We are now 124 months into the current economic recovery – the longest in modern times. Manufacturing is slowing, earnings are slowing, and stocks are not attractively priced. We believe we are closer to the end of this economic cycle than the beginning and are positioning portfolios accordingly.
We greatly appreciate the opportunity to work with each of you. We recognize that each client’s situation is unique and incorporates different factors into their investment and financial plan.
As always, if you have any questions or concerns about current market trends and the impact on your personal situation and plan, please contact us and we would be happy to discuss.
Please follow this link to read the complete Quarterly Market Review Q2 2019.