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.lancas[email protected]
|Index||Market||03/31/19 – 06/30/19||Year-to-Date – 06/30/19|
|Standard & Poor’s 500||Large Co. U.S. Stocks||4.3%||18.5%|
|Russell 1000 Value||Large Co. Value U.S. Stocks||3.8%||16.2%|
|Russell 2000||Small Co. U.S. Stocks||2.1%||17%|
|MSCI All-Country World ex U.S.||Foreign Stocks||3.0%||13.6%|
|Barclays 1-5 Year Gov’t/Credit||U.S. Shorter-Term Taxable Bonds||1.9%||3.6%|
|Barclays Aggregate Bond||U.S. Taxable Bonds (Broad-based)||3.1%||6.1%|
|Barclays 1-5 Year Muni Bond||U.S. Shorter-Term Tax Exempt Bonds||1.1%||2.5%|
|JPMorgan Global Ex-U.S. Bonds||Hedged Foreign Bonds||3.1%||6.3%|
Key economic indicators compiled by Jeffrey Blanchard, CFA, Director of Research; [email protected]
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