Quarterly Market Update – Q2 2019 By: Gabriel PotterMBA, AIFA® 2019.07.29

Key news stories

The fundamental economic data has been good thus far.  Unemployment, earnings, consumer sentiment, business sentiment, and profitability are all generally positive.  On the other hand, there are warning signs which suggest the economy may have turned a corner in the second quarter.  The yield curve has been inverted for the past three months, which heretofore has been a leading indicator of recession.  More importantly, this consistent inversion has not historically been a “false-positive” signal; economists – sometimes a dismal bunch – predict a greater number of recessions than those which actually occur.  In real world, many blue-chip companies are reporting slower growth and signaling low expectations for the next earnings season.

Equities

The market has been hitting record highs in the past quarter, although the trade dispute with China and other international trading partners continues to weigh on the results of emerging markets and other international investments.  Stock market technical analysts have noted that the recent rally in prices is partially due to a large scale company repurchasing, i.e. buy-backs of their own stock.

 

INDEX

2Q 2019

YTD 2019

US Large Cap Growth - Russell 1000 Growth

4.64

21.49

US Large Cap Value - Russell 1000 Value

3.84

16.24

US Small Cap Growth - Russell 2000 Growth

2.75

20.36

US Small Cap Value - Russell 2000 Value

1.38

13.47

Developed International Markets - MSCI EAFE

3.68

14.03

Emerging Markets - MSCI EM

0.61

10.58

Bonds

The Federal Reserve usually reacts to economic conditions, but many people in the administration would like the august institution to act defensively to prevent a growth pullback or even a weak recession.  Reacting to pressure, the Fed signaled that they would stop raising rates and may, in fact, start cutting rates; as a reminder, a drop in rates generally creates an increase in bond prices. All major bond classes gained ground in the quarter but the news was a huge boon to long duration bonds, by definition the bonds with the greatest sensitivity to interest rates.

INDEX

2Q 2019

YTD 2019

Barclays Capital US Aggregate Bond

3.08

6.11

Barclays Capital US Intermediate Credit

2.99

6.65

Barclays Capital US Government

2.99

5.15

Barclays Capital US Gov’t/Credit Long Duration

6.59

13.46

ICE B. of America/Merrill Lynch High Yield

2.57

10.16

FTSE World Government Bond Index (non USD)

3.93

5.50

 Alternatives

If we are heading into another low interest rate environment, the hunger for high yield investments – like Real Estate – may continue to show strength.  Commodity indices are mixed.  Flooding and poor weather in the Midwest put a bull price market for agricultural goods like corn.  An expansion in plant-based proteins in fast-food outlets and grocery stores is putting downward pressure on livestock and animal commodities.  Potential weakness for the US dollar due to lowered rates translated to a boost for precious metals.  Weakness in trade and construction put a damper on basic metals.

INDEX

2Q 2019

YTD 2019

Real Estate - FTSE NAREIT All REITs TR

1.77

18.77

Commodities - Morningstar Long Only Commodity TR

-0.12

10.33

Inflation - Barclays US Treasury TIPS

2.86

6.15

Hedge Fund - Morningstar Broad Hedge Fund TR USD

2.16

3.87


Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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