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Quarterly Summaries

2019 Quarterly Summaries

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Review of Securities Markets, Second Quarter, 2019

Though not entirely a smooth ride, global stocks and bonds registered solid gains in the second quarter. April began with U.S. stocks sitting atop record highs, but confidence in continued economic growth diminished in May, when it began to appear as if U.S.-China trade and intellectual property disputes would not dissipate, as many had blithely assumed would be the case under a business-friendly U.S. administration. As trade negotiations bogged down, U.S. stocks, as measured by the S&P 500, fell more than 6% in May and further declines seemed likely in early June when the Labor Department released a disappointing monthly jobs report. In the now familiar territory of “thankfully the economy may be worse than we thought,” these two pieces of otherwise discouraging news stimulated a series of increasingly dovish noises from both the U.S. Federal Reserve and the European Central Bank. The promise of interest rates “lower than we indicated previously” pushed prices of both stocks and bonds higher throughout most of the world.

Within the United States, the stronger and weaker parts of the stock market were largely unchanged from recent, prior quarters, with larger companies providing higher returns than smaller companies, and growth stocks besting value stocks.

The S&P 500 gained 4.3% during the quarter, ending the half-year up 18.5%. Growth stocks, as measured by the Russell 1000 Growth index, gained 4.6% in the second quarter, for a year-to-date return of 21.5%. Value stocks, as measured by the Russell 1000 Value Index, rose 3.8% during the quarter and were up 16.2% through June 30. The Russell 2000 index, a major benchmark of small company stocks, rose 2.1% in the second quarter. For the first half of the year, small cap stocks were up 17.0%.

Foreign stock returns were also positive in the second quarter, with most of the gains concentrated in developed country stocks. The MSCI AC World ex U.S. Index generated a return of 3.0% and was up 13.6% in the first half of the year. Foreign value and small company stock returns were largely flat in the quarter, though both were still up close to 10% through June 30. Emerging markets generated modestly positive returns in the second quarter, and the MSCI EM Index was up 10.6% in the first half of 2019.

As noted above, lower interest rates led to higher bond prices. The Barclays Aggregate Bond Index returned 3.1% in the second quarter, with year-to-date returns of 6.1%. Foreign bonds also gained 3.1% in the quarter, as measured by the JPMorgan Global Ex-US Bond Hedged Index, bringing year-to-date returns to 6.3%.

Mostly Good Economic News

The current U.S. economic expansion is far less robust than we experienced during the booming 1990s, and yet the duration of stable economic growth and low inflation continues to impress. Indeed, according to the National Bureau of Economic Research we are now in the longest period of sustained economic growth in our country’s history.1

This long expansion has been especially beneficial to the jobs market, with the U.S. unemployment rate reaching 3.6% in April, the lowest level in 50 years. These abidingly positive developments were forecast by no one, neither by your most optimistic friends nor by overwrought Tiger Parents who coaxed children nervously amidst a backdrop of economic anxiety. Today, Class of ’19 graduates with a modicum of hustle and smarts often secure multiple full-time job offers. A decade ago, even the brightest students counted themselves lucky to find any decent job and were wise to accept quickly whatever salary was offered lest they boomerang home to the couch in the basement.

Those constitutionally inclined to worry about the next downturn in the economy may acknowledge yesterday’s good news but focus instead on the languid growth expectations reflected in global bond yields. To be sure, the interest rates on offer are decidedly low, and this typically signals that investors weigh the risk of higher inflation -the concomitant of higher growth- as low. In the U.S., for example, the yield on the 10-Year Treasury bond was 3.2% in November of last year. Today that rate is down to 2.1%. (The friend who told you, “rates can only go up from here” … well, he was wrong.) Rates are even lower elsewhere. In Germany, the 10-year government bond yields -0.3%. “Yields” are negative in Japan, too. Many fear subdued growth and extremely low inflation may be an all but permanent feature of the most advanced economies. This was suggested when the government of Austria sold bonds in late June with a maturity of 100 years(!) and a yield of just 1.2%.

The rally in stocks this year, extending a bull market in the U.S. that has now run for more than 10 years, suggests that stock investors do not share the deeply pessimistic growth assumptions reflected in global bond yields. So which market is right regarding the prospects for future growth, stocks or bonds? Over the longer term, the stock market has the odds in its favor, but the shorter-term outlook is murkier. Against this backdrop of uncertainty, we recommend investors diversify broadly across and within asset classes, and favor segments of the market that are more reasonably valued.

1. Financial Times, ‘U.S Economic Expansion Becomes Longest on History’, https://www.ft.com/content/5c443804-9c41-11e9-b8ce-8b459ed04726

Written by Jeff D.Lancaster, CFP®, Principal; jeff.lancaster@bosinvest.com

Quarterly Review of Securities Markets: Total Return

IndexMarket03/31/19 – 06/30/19Year-to-Date – 06/30/19
Standard & Poor’s 500Large Co. U.S. Stocks4.3%18.5%
Russell 1000 ValueLarge Co. Value U.S. Stocks3.8%16.2%
Russell 2000Small Co. U.S. Stocks2.1%17%
MSCI All-Country World ex U.S.Foreign Stocks3.0%13.6%
Barclays 1-5 Year Gov’t/CreditU.S. Shorter-Term Taxable Bonds1.9%3.6%
Barclays Aggregate BondU.S. Taxable Bonds (Broad-based)3.1%6.1%
Barclays 1-5 Year Muni BondU.S. Shorter-Term Tax Exempt Bonds1.1%2.5%
JPMorgan Global Ex-U.S. BondsHedged Foreign Bonds3.1%6.3%

Key Economic Indicators

  • The latest U.S. GDP figures (first quarter 2019) showed the economy growing at an annualized rate of 3.1%. Sluggish consumer spending growth of 0.9% was offset by solid growth in business spending of 4.4%. Inventories and net exports contributed an unusually large amount to GDP growth during the first quarter but strong growth in these areas is not expected to continue in the second quarter.
  • The U.S. employment report for June continued to show strong job growth. Nonfarm payrolls increased by 224,000 which was well above expectations. The unemployment rate rose slightly to 3.7%. Wages grew 3.1% on an annual basis which was the same reading as the prior month.
  • The latest report on U.S. inflation (May) showed an annual increase in the Consumer Price Index of 1.8% which was lower than the prior month’s reading of 2.0%. Prices for energy, food, and medical care were the main drivers of the moderating inflation rate. Core CPI (CPI excluding food and energy) posted an annual increase of 2.1%.
  • The U.S. Federal Reserve kept rates unchanged at its last meeting in June but suggested that rising uncertainties may lead to easier monetary policy in the future. The Fed downgraded economic activity from “solid” to “moderate,” citing a slowdown in business investment due to a decline in global manufacturing and cross-border trade. The Fed also decreased its inflation forecast, predicting that inflation will achieve its target of 2% but that it will take longer to get there than previously anticipated.
  • The Bloomberg Commodity Index was down 1.2% during the second quarter. The price of oil declined 3.3% during the quarter to $58 per barrel. Gold rallied strongly due to economic concerns and rising tensions between the U.S. and Iran. Gold was up 8.9% for the quarter and closed at $1,412 an ounce. The price of silver rose 1.7% during the second quarter to $15.36 per ounce.

Key economic indicators compiled by Jeffrey Blanchard, CFA, Director of Research; jeffrey.blanchard@bosinvest.com

Disclosures:

The information presented within is for informational purposes only and is not intended to be used as a general guide to investing or financial planning, or as a source of any specific recommendations, and makes no implied or express recommendations concerning the manner in which any individual’s account should or would be handled, as appropriate investment or financial planning strategies depend upon the individual’s specific objectives. It is the responsibility of any person or persons in possession of this material to inform himself or herself of and to seek appropriate advice regarding, any investment or financial planning decisions, legal requirements, and taxation regulations which might be relevant to the topic of this report or the subscription, purchase, holding, exchange, redemption or disposal of any investments.

The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed and inherent in any investment is the potential for loss.

This report does not constitute a solicitation in any jurisdiction in which such a solicitation is unlawful or to any person to whom it is unlawful. Moreover, this report neither constitutes an offer to enter into an investment agreement nor an invitation to respond by making an offer to enter into an investment agreement.

Opinions expressed are current opinions as of the date appearing in this material only and are subject to change. No part of this material may, without the prior written consent of Bingham, Osborn & Scarborough, LLC, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient.

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