Q2 2019 Market Review

Summer is in full swing and through mid-year, the news impacting the markets remains much the same as it has been for quite some time. Stocks are reaching new highs, despite rising fears over a global economic slowdown and the escalating tensions between the U.S. and China.

Both continue to dominate the news cycle, along with how they will affect the Federal Reserve’s policy decisions on interest rates. While the headlines have remained the same for the last year and a half, the markets have been anything but boring with lots of swings in both directions. Most stock and bond investors around the world have seen solid returns this year simply by being invested, but it may surprise many that the broad market averages remain just about where they were at the beginning of 2018. A lot of work, but we remain in a similar place! While I have written about the trade war for the last few quarters and it would be nice to write something new, this continues to be highly relevant in discussions of the health of the economy and value of client portfolios. It seems a comprehensive deal is unlikely in the short-term with neither side seemingly in a hurry to end the trade war, despite President Trump and Xi Jinping agreeing to hold off on new tariffs and proceed with negotiations. We have now seen that uncertainties in trade can create short-term market volatility, and trade tensions are not limited to talks with China - Mexico, Canada, India, and the Eurozone have all played into market anxieties. Thus far, investors have been rewarded for being patient as is evident by the recent market highs. That leaves us still wondering how much longer this record-breaking, 121-month and counting economic expansion, that started in June 2009, will run. As I’ve communicated time and time again, while this expansion is a record-breaker, it has also been one of the slowest with GDP just averaging half of the average growth rate of the ten previous expansions. The lingering trade stalemate and eventual tariffs will likely start causing damage to the U.S. economy and investors appear to be relying on monetary policy, with an expectation that the Fed will lower interest rates to offset any impact to the economy. Rate cuts are generally bullish for the equity markets, with lower rates making bonds less appealing and driving investors into risk assets (stocks). But, the reasons for a more dovish Fed will certainly weigh on the markets and investors' minds, and it is doubtful that Fed policy alone will be enough to push the economy forward if businesses are fearful of investing in the economy with more hiring and capital spending. Keeping an eye on both business and consumer confidence will be important in regards to the outlook for the economy. Earnings season gets underway this week and even though we are seeing stock market highs, expectations about earnings are very low. Although we have not yet seen much in the way of impact on earnings from the trade war, we should be mindful of potentially negative impact on those earnings if tariffs increase. Geopolitical risks remain as well, particularly with the rising conflict in the Middle East, and are also capable of flaring up at any time. Pay attention to the news, but do not let headlines guide your investment decisions because the market will react sharply in the short-term. What this all means is that as always, investors should remain vigilant in a broadly diversified portfolio that includes multiple asset classes including stocks, bonds, cash and alternatives. Market timing is not an effective long-term strategy and we will continue to focus on making sure portfolios are properly allocated according to your long-term goals and risk tolerances. Please help us keep the lines of communication open with regard to any changes in your short-term needs or changes in your objectives, and contact me directly with any questions or to schedule a time to review your portfolio. Enjoy the rest of your summer!

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