Second Quarter Market Review
In the era of the Trump presidency, headlines abound that can drive markets up one minute and down the next. At times it can be difficult to discern what truly mattered to markets. So what mattered in the second quarter? Although headlines were numerous, the primary focus was on two unknowns: China-US trade relations and the Federal Reserve interest rate policy.
At the end of April, optimism of a US-China trade deal sent markets higher, but this enthusiasm was short lived. On May 5th, President Trump’s tweet of additional tariffs on $300 billion of Chinese imports, as well as a 10% tariff on imports from Mexico, caused anxiety for markets. Complicating matters, US sanctions on Chinese telecom firm Huawei, coupled with rumors of China restricting access to rare earth minerals, caused trade talks to breakdown, sparking fears of a technology cold war. Although talks have resumed, markets are anxiously awaiting a resolution that could be quite a ways off.
The other main talking point this quarter surrounded comments from Fed Chairman Jay Powell and other members of the Federal Reserve. Earlier in the quarter, markets anticipated interest rates would stay unchanged given commentary from Chairman Powell that the Fed would be “patient” and would “wait and see” at the June Fed meeting. However the “Powell Put” or “Powell Pivot” was in play at the end of the quarter, as recent commentary has suggested inflation is running below the Federal Reserves target of 2%, while the job market and wage inflation is not running as “hot” as they would like. Couple these two “cross-currents” as the Fed Chairman stated, plus a backdrop of mixed economic data, and fixed income markets have implied a rate cut at the upcoming July meeting.
Based largely on the new Fed forecast, global stocks were higher in the second quarter, following the first quarter’s sharp rise upward, closing out the best first half of the year since 1997. The prospect of lower interest rates and easier monetary policy helped both US large and small cap stocks this quarter. Financials led the market, as all 18 major banks received the green light for their capital adequacy plans by the Federal Reserve, while materials and technology sectors also provided market leadership. More defensive sectors like healthcare and utilities lagged. Despite gold rising almost 9% in the quarter, commodities were the notable laggard due to lower oil prices, as concerns of trade disputes slowing global growth and rising geo-political tensions between the US and Iran held back energy. All things considered, this quarter was a very good quarter for global equity markets.
As viewed from the perspective of a financial cartoonist, the Federal Reserve has effectively stated they are not taking the punch bowl away, rather they are filling it back up in the form of lower interest rates. The markets clearly liked that signal, hence the references to Jerome Powell as Santa Claus and the need for more cowbell for Mr. Bull Market.
While it seems although we are one tweet away from new all-time highs in the markets, or one tweet away from a market correction, we know that the “noise” surrounding headlines is just that, noise. Funny cartoons aside, focusing on data and our long-term investment perspective guides our investment decision making. Research firm Morningstar recently stated that through the first half of 2019, there have only been 4 trading days in which the S&P 500 has moved by +/-2% or more (2 positive and 2 negative days) in 2019. Compare this to last year when there were 20 trading days where U.S. stocks moved +/-2%. The average since 1950 is 11 days of +/-2% moves in the market. Although the noise, headlines, and funny cartoons seem never ending, markets have taken it all in stride.
As we have seen in 2018 and in more volatile quarters, the best offense is usually a good defense, and we know no better defense than to be prepared for market volatility with globally-diversified portfolios. We thank our clients and friends for their continued trust and support of Madison.