Whether you are a stock investor or a bond investor, the first half of 2019 was outstanding for financial markets. This has been a huge about-face from December when markets pulled back and sentiment was grim. The S&P 500 had it’s best June month in over 60 years. Not that we’re getting overly excited about a strong month, but across the board people are seeing positive returns over the past 3, 6, and 12 months. It may seem counter-intuitive for risk assets to rally at the same time as safe haven assets, but that’s what has happened as of late.
Here’s how some of the major metrics fared:
|
Index |
2nd Quarter |
1YR |
|
S&P 500 Large Cap Index |
3.79% |
10.42% |
|
S&P Small Cap 600 Index |
1.49% |
-6.30% |
|
S&P Developed BMI International Index |
3.00% |
4.99% |
|
S&P U.S. Aggregate Bond Index (total return) |
2.57% |
6.70% |
|
S&P Municipal Bond Index (total return) |
2.12% |
6.39% |
|
Dow Jones Equity All REIT Index |
0.91% |
8.71% |
|
Dow Jones Commodity Index (spot return) |
-0.25% |
-3.36% |
Click here to view a comprehensive list of index returns.
|
Source: Dow Jones, data as/of 6-28-2019 (doesn’t include dividends unless noted) |
The market’s gains were widespread, but Q2 wasn’t exactly a smooth ride higher. The roller coaster market started off well in April, but experienced a large pullback in May mostly in part to investor fear about trade/tariff tensions with U.S. and China. Then in June, central banks came to the rescue. Based on weaker economic data, they appear to be more inclined to lower rates than increase them. In a sense, bad economic news was good news for the markets. Go figure.
Worth noting is a recent relative weakness in small cap stocks. History tells us that small U.S. companies tend to be more volatile than large U.S. companies, but in general move in the same direction. However over the past year, the Russell 2000 (a common small cap index) is one of the few asset classes which is in the red. They currently lag their large cap counterparts by the largest amount since the bull market started 10 years ago. I’ve read reports that this could be a warning sign as to the future of the economy, then read studies which tell the exact opposite and say they are simply playing catch up. Either way, we all have “small caps” in our portfolio as part of our diversification strategy and will continue to.
Because of the inverse relationship of bond price and bond yields, we know that if bonds are doing well that means rates have come down. They did exactly that, and the 10 year Treasury bond finished the quarter at 2% (it started the year at 2.65%). As I write this, people are debating on whether rates need to go higher – or lower. One thing is certain: bond asset classes of all types – from U.S. corporate bonds to high yield bonds to International emerging market debt – all have seen solid gains in 2019. Some as high as double digits.
As long in the tooth as this current bull market is, studies have shown that the length of this expansion virtually has no influence on the probability of entering a recession. We may continue to see slower growth in the quarters ahead, but based on what I’m reading there is no evidence of recession in our sight in the near-term.
In fact, a strong argument can be made that the market environment still looks fairly accommodating to investors. If we can handle the inevitable “gloom and doom” stories in the media in the coming months, I think disciplined investors will continue to be rewarded. Just hold on to your hats!
Brandon
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