The second quarter of 2019 (Q2) seemed full of continued trade-related market volatility and speculation about interest rates. Both categories each sent the markets down and then up again during the quarter. While May saw stocks fall 6+%, the quarter ended on a high note brought on by, you guessed it, more news about trade and interest rates.
Here’s a summary of how major market indexes ended the quarter and year-to-date, respectively (as a reminder, the YTD numbers look very strong, but this is off deep lows in December):
- S&P 500: up 4.3%, up 18.5%
- Russell 2000 (small company stocks): up 2.1%, up 17%
- MSCI EAFE (foreign stocks): up 4%, up 14.5%
- MSCI EM (emerging markets): up 0.7%, up 10.8%
- U.S. Aggregate Bonds: up 3.1%, up 6.1%
The financial sector was the top performer during Q2, showing growth of about 8%. Technology continued its strong performance and is the best performing sector this year, up about 27% YTD. Energy stocks performed poorly, down about 3% during the quarter. Although the sector performed well during June as oil prices rose to the high-$50’s per barrel, it wasn’t enough to make up for poor performance during April and May. Gold was up as well, about 10% YTD with almost all that performance happening in June.
As has become all too familiar lately, trade rhetoric and geopolitical concerns caused a lot of market volatility during Q2, both positive and negative. April and May saw more tweets from President Trump about potential new tariffs directed at China followed by a short-term tariff-related row with Mexico. The latter ended up fizzling but was enough to add a layer of uncertainty to markets already digesting the resignation of the British PM after failing to deliver Brexit. Much of this tension eased, however, as we entered June and markets took off for the remainder of the quarter.
Before we begin, I wanted to say a few words regarding my post from last week. I had written about the importance of charging rent to “boomerang kids” when they move back home. The idea is to welcome them as the adults they’ve become with an understanding, on both sides, of what’s expected.
This isn’t to suggest that you charge rent in all cases, however. Our kids could move back for any number of reasons and many of them, such has health-related issues, personal trauma, and so forth, would (and should) reasonably be free from rent for obvious reasons. I failed to mention this last week and wanted to clarify that here (thanks for the reminder - you know who you are).
Now on to this week’s post…
As often happens in the short-term, financial markets are all over the place. Stocks have moved up from recent lows, but the interesting activity has been mostly in the bond market. I’ve mentioned previously how the yield curve is currently inverted and how this has been a good indicator of an oncoming recession. Let’s update where we stand.
My research partners at Bespoke Investment Group put out a very good piece last week addressing how long the yield curve normally stays inverted before it starts flashing a bright red light, so to speak, for a coming recession. As shown in the graphic below, out of the seven recession periods (the gray bars) in recent decades, the yield curve has been inverted for at least 30 days, but more commonly at least 50, before being a better signal.
If you look closely, you’ll also see a lengthy inversion in 1967 that didn’t precede a recession, as well as a couple of blips as outliers in the late 90’s. While not a foregone conclusion, our current inversion is about 20 days old, so we’re knocking on the door of this becoming a more meaningful indicator.
What’s going on with the stock market? That’s a question several of you have asked in the last week. I thought I’d answer the question here as well since I’m sure others are also wondering. The short answer is that this is a normal bout of volatility that is part of getting good long-term returns. But since the slightly longer answer is usually more interesting, here goes…
Although stocks have logged decent performance of about 4% in the past 12 months, you’d be forgiven if you felt like it’s been a bit of a rollercoaster ride getting there. We had all that volatility to end 2018 when stocks fell almost 20%. Then we had a good upsurge to start 2019, only to be followed by stocks falling 6% in May. These gyrations are due in large part to several risks, some of which are new while some could be considered old (but persistent) news.
We’ve previously discussed how we’re nearing the end of the economic cycle that began during the Great Recession. This is old news. As the cycle starts to slow investors get nervous and headlines that might otherwise get overlooked take on greater significance. For example, it turns out Google may be subject to an antitrust investigation by the Department of Justice, and possibly Amazon and Facebook as well. Since the tech industry makes up nearly a quarter of the S&P 500, the long-term viability of the business models of these companies matters a great deal. I don’t know that these antitrust revelations are necessarily new, but they contribute to a growing sense of anxiety within the stock market.
Piling on last month was worsening geopolitical and trade news. We learned that British PM Theresa May was resigning after failing to deliver Brexit. This almost ensures another down-to-the-wire ordeal come October when their extension to leave the European Union ends. Continued disfunction around Brexit adds to fears about the structure of the EU itself. Taken to the extreme, the EU collapsing as other countries with nationalist tendencies try to leave would obviously have far-reaching ramifications. On top of this we learned of more tariffs from the Trump Administration directed at China and, at month’s end, potential tariffs aimed at Mexico. All of this raises the tension level in the room, so to speak.