The second quarter of 2019 continued to be volatile. The roller coaster market started off well in April, but experienced a large and swift pullback in May, mostly due to investors’ fear about trade and tariff tension with U.S. and China, only to rebound and soar by the end of the quarter. With the best June in almost sixty years and stock prices hitting new highs, stocks ended the quarter and the first half of 2019 with solid returns. The gains were widespread with every major market index reaching double-digit returns for the year by the end of June. The S&P 500 Index led the way, followed closely by the tech stocks in the NASDAQ and the blue chip stocks of the Dow Jones Industrial Average, as well as the small and mid-capitalization stocks of the S&P 400 and Russell 2000 Indexes. Every sector of our domestic economy except energy advanced during the second quarter. The more economically sensitive areas of the market generally performed strongly, with the financials, materials and information technology sectors generating robust gains.
Despite the trade tariff standoff and continued warnings of a global slowdown, the international markets also posted positive returns, closely following the U.S. equity markets.
Stocks were not the only market that delivered gains. As the equities rotated from bullish to bearish and then back to bullish, the bond market also displayed resiliency. In the beginning of the quarter long-term interest rates edged higher, but the mid-quarter stock correction caused yields to decline, and as the equity markets set record highs towards the end of June, inflows into U.S. Treasuries have kept yields low, continuing the 3 month-10 year yield curve inversion that began a month ago. As a result, the Barclays U.S. Aggregate Bond Index made solid advances for the quarter and year-to-date.
News on the economic front was largely positive in the second quarter. First quarter U.S. GDP was initially reported and later revised to well above the expected rate. The strong consumer has been the backbone of this economy and all the key metrics such as personal income, personal spending and retail sales gained this quarter. The employment picture remained bright with the unemployment rate being lowest in fifty years. Despite new tariffs and a strong dollar, the annual inflation rate is still running very close to the Federal Reserve’s target. On the other hand, business confidence weakened and the survey’s data indicated that business activity might be slowing, and housing activity was inconsistent at best.
As expected, the Federal Open Market Committee (FOMC) did not change interest rates following its latest meeting in June. Lack of price inflation and slowing economic growth underscored the Committee’s reluctance to raise rates. In fact, a projection released by the FOMC showed the federal funds rate range between 1.9% and 2.4% by the end of 2019.
With the economy still growing, the real worries last quarter were political. Fears of a trade war with China shook investors’ confidence, while worries about the Mueller report and the continuing Washington drama also took their toll. North Korea, Brexit, and even the Fed caused shoppers and investors to pull back. At the same time, as of the end of the quarter, the Mueller report had come and gone, the conflict between Congress and the White House continued but had not sunk the ship of state, and the trade war remained at the “cold” stage rather than getting worse. While all these worries caused some damage, they were not big enough to derail the economy as a whole.
As 2019 reaches its midpoint, and the bull market and last economic expansion both became the longest in history, one question on the minds of investors and market watchers seems to be whether the solid performance of the first half of 2019 was a template for the rest of the year or just an abnormality. Can the equity and fixed income markets build on the strong gains of the year’s first half or we have finally seen the last leg of this incredible bull market run?
With a positive outlook on the economy, falling interest rates and attractive valuations, equity prices should weather the ups and downs of trade and tariff negotiations.
Dumont & Blake Investment Advisors, LLC
June 30, 2019