2Q19 MARKET OVERVIEW
After a painful mid-quarter global equity market pullback, optimism returned to this long-lasting bull market. In June, the U.S. economic expansion reached a record setting 121 months, breaking the previous record set in 2001.
In a rare quarter when both equities and bonds simultaneously closed higher, Federal Reserve Chairman Jerome Powell continued his dovish stance to ease any fears that rate hikes were on the horizon. In fact, even after a strong jobs report, Powell hinted that a rate cut may be warranted to continue the impressive global growth trajectory.
With equities at record highs, volatility could return swiftly if the Fed changes course or if a favorable the U.S. – China trade deal is not completed since both appear to be priced into market valuations. Other headwinds could focus on Iran threats and a disorderly Brexit.
Regardless of the market direction, our rebalancing process will take advantage of the market
movements to shift towards our target allocations in the most tax-efficient manner possible while maintaining your desired risk level.
U.S. Equity Markets
Following the sharp May trade disruption downturn, U.S. equity markets rebounded with the Russell 3000 gaining 4.1% during the quarter. Although the Federal Reserve decided not to cut rates at their June meeting, they gave the impression that they would do what was necessary to continue the expansion to combat softer economic activity and lower business confidence. As expected, U.S. GDP grew 3.1% year over year in the first quarter, however, most economists continue to believe that GDP growth will settle in about 2.0 % growth for the full year. In early July, the U.S. Labor Department reported that employers added 224,000 jobs in June and average hourly earnings rose 3.1% over the past year. This more positive jobs report may force the Fed to reconsider a near-term interest rate cut which may add volatility since investors already factored in the possibility. Regardless of President Trump’s unorthodox trade policy approach and increased geo-political tensions, the markets should continue to march in the direction of actual earnings and slowing forecasts.
International Equity Markets
International developed equity markets rebounded from the May sell-off with a solid 3.7% quarter gain for the MSCI EAFE. Calmer trade war discussions in June paved the way for a quicker eurozone equity market recovery. After the eurozone confirmed its modest GDP quarterly growth of 0.4% and annual inflation of only 1.4%, European Central Bank President Mario Draghi hinted at further monetary easing. Japan’s equity markets struggled in the second quarter with a 2.4% loss as they posted a disappointing 0.50% annual core inflation increase. The Bank of Japan reaffirmed its willingness to provide more stimulus to spark economic growth and demand. After the U.S. threatened China with more tariffs in May and then backed off following the G20 Osaka summit, the Chinese indices regained their footing.
The more positive trade negotiations helped the MSCI emerging markets recover 6.2% in June to finish the quarter relatively flat. As the markets continue to work through the trade talks, both developed and undeveloped international markets look even more attractive from a valuation perspective compared to U.S. markets.
Fixed Income Markets
Safety-minded investors experienced positive results as the closely watched Barclays Aggregate rose 3.1% during the quarter. After the Fed continued its dovish stance to counter the softer economic global landscape, they pledged to take a “patient” approach to tightening monetary policy. Factoring in this accommodative posture, the 10-year Treasury retreated further from 2.41% on March 31 to 2.0% on June 30. As the U.S. economy displayed signs of weakness, the Fed felt it was necessary to back off on future interest rates increases which eased fears and increased expectations of a rate cut. Given the quick yield decrease, longer maturities benefited most. The Barclays US Government Long posted a 6.0% quarter gain, Intermediate 2.3% gain and Short 1.5% gain. In the international fixed-income arena, the
JPM Non-US Unhedged gained 3.8%. Strong demand and limited supply helped elevate the Barclays Municipal another 2.1% as investors searched for more favorable after-tax returns.