2019 Second Quarter Market Commentary

During the second quarter of 2019, equity markets churned out another solid performance, despite experiencing some inter-month volatility. The Russell 3000 Index, one of the broadest measures of domestic stock market performance, gained +4.1% during the quarter and is up +18.7% year-to-date. Over the trailing twelve-month period dating back to last July, the index has produced a +9.0% annual return, a figure right in-line with the +9.4% average annualized return since its inception in 1994. The lesson, as always, is that while returns can jump around from month-to-month and quarter-to-quarter, the patient investor is usually rewarded by having a long-term outlook and a disciplined investment approach (more on that below).

Elsewhere, international stocks gained +3.0% on the quarter and are up +13.6% YTD per the MSCI ACWI ex-US Index. Bonds produced another quarter of gains on the back of falling interest rates, with the Bloomberg Barclays US Aggregate Bond Index advancing +3.1% QTD for a gain of +6.1% YTD. 10-year Treasury yields fell from 2.4% at the end of Q1 to 2.0% in Q2, with markets seemingly losing faith that the current economic expansion can continue without the aid of a Fed rate cut. Gold prices, which act as a safe haven investment, perhaps benefited from lower interest rates and a dampened economic outlook, rallied +7.1% in Q2 for a +9.7% gain YTD.

As we look toward the second half of the year, the story is a familiar one: How do we reconcile rising asset prices with the great deal of negative chatter around the future growth of the global economy? As always, we aim to filter the news and noise through the lens of our “Three Dials” framework. Below is a primer on where each of our primary indicators stand through the first six months of 2019:

1. Market Sentiment and Momentum: Positive (upgraded from “Neutral” last quarter)

With double-digit year-to-date gains for global stocks and new all-time highs for the S&P 500 and the Dow Jones Industrial Average, a buying appetite has certainly returned to equity markets through the end of June. Our Momentum Dial sat in a “Neutral” position at the end of Q1, as investors were still licking their wounds from last year’s losses, but continued strength through the end of this quarter has lifted our Momentum reading to “Positive” for the time being.

2. Economic Fundamentals: Positive (unchanged from last quarter)

The University of Michigan Consumer Sentiment index reached a 15-year high in May, a sign that economic activity should remain strong in the near-term. Meanwhile, declining borrowing rates should serve to support the housing market. While the ebb and flow of trade talks can cause monthly fluctuations in the data, economic indicators on the whole continue to point towards growth, and as such our Fundamental Dial remains in a “Positive” position.

3. Valuation: Negative (unchanged from last quarter)

Cyclically adjusted price-to-earnings ratios indicate rich valuations for stocks today compared to their historical norms. Late in an economic cycle, we would prefer to buy assets that appear attractively priced, rather than overpaying for risk in an effort to squeeze every ounce of return out of an aging bull market. As such, our Valuation Dial remains in a “Negative” position.

On balance, our Three Dials composite reading takes a “Cautiously Optimistic” stance, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns. As always, we are monitoring new developments as they arise and will communicate any changes accordingly.

Sources:

[1] https://indexcalculator.ftserussell.com/

[2] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/default.aspx

[3] https://www.bloomberg.com/news/articles/2019-05-17/u-s-consumer-sentiment-jumps-to-15-year-high-on-upbeat-outlook