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Quarterly Investment Commentary – Q2 2019

 

MARKET RETURNS: Global stocks generated solid results in the second quarter characterized by a negative month of returns in May bookended by positive months for both April and June.  Concerns regarding trade negotiations between the U.S. and China ramped up during the quarter as rhetoric intensified around the potential for increased tariffs between the two economic powers.  U.S. stocks still managed to outperform non-U.S. stocks, however, as concerns regarding trade were eased by rising expectations that the Fed could cut interest rates in the second half of this year.  The yield curve inverted again during the quarter and remained so to finish the period with 3-month U.S. Treasury yields exceeding 10-year yields, raising concerns of an increased probability of a recession.  With longer-dated yields dropping more than shorter-dated yields, U.S. bond investors enjoyed very good returns last quarter as bond prices rise when yields fall.  The same can be said for global bond investors as government yields reached rock-bottom levels across many European countries and Japan.

 


LOOKING FORWARD

U.S. Economy: As we have previously noted in our commentaries, while U.S. GDP growth is positiveit has slowed with current U.S. GDP tracking at 1.5% versus the 3.1% annualized growth rate in the first quarter. We believe the benefits of last year’s tax cuts have passed through the economy and trade uncertainty has led to a slowdown in business investment. While unemployment at 3.6% is very low from a historical standpoint, wage growth is also low as depicted by the chart provided by J.P. Morgan Asset Management. While low unemployment would generally lead to higher wage growth and ultimately a pick-up in inflation, the Fed is forecasting only a small uptick in inflation from 1.5% this year to 1.9% next year and 2% beyond suggesting the economy is not at risk of overheating. Without runaway inflation as a concern, the Fed is likely to focus on the potential economic risks posed by the trade negotiations between the U.S. and China. If the U.S. and China were to resolve their trade dispute this could eliminate uncertainty which could help lift stock prices, although current valuations and lower earnings growth expectations suggest less upside in the second half of this year than what we have experienced in the year’s first half.

 


Interest Rates and Impact on Volatility
: With a slowing economy and with inflation seemingly in check, investors have raised their expectations for the Fed to cut rates with a possible half-of-a-percent reduction this year and another quarter-of-a-percent drop in 2020. What may keep the Fed from lowering rates aside from a resolution on trade between the U.S. and China is thefact that the economy is still growing and employment is still healthy as a recent jobs report for June saw a better-than-expected increase in jobs added. In any Fed-related rate move scenario, what we will be looking for is the action in the yield curvewhich can be considered a future barometer of growth expectations –a steepening would imply better economic prospects ahead while a flattening may lead to further concerns of a slowdown. An increase in stock volatility may be likely as investors anticipate a rate cut when the Fed meets in its next FOMC meeting in July.

 

Conclusion: The data suggests the U.S. economy is slowing but if uncertainty is removed around trade, stocks can still offer upside, albeit at likely lower returns than we have had this year so far. A continued flattening of the yield curve could lead to investor concerns of increased recession risk which could bring increased market volatility. We will continue to watch the markets and will provide updates as warranted.

 

We appreciate your continued confidence and hope you have a great summer!

 

(Your Q2 2019 and trailing periods personal account performance is reflected on your quarterly performance report, a version of which your advisor will review with you during your next portfolio or annual planning meeting.)

 

Index Descriptions:
  • S&P 500 Index TR is a market capitalization weighted index which represents the broad market for large company U.S. stocks.  Returns reflect the reinvestment of dividends and do not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The MSCI EAFE Index NR USD is a market capitalization weighted index which represents the broad market for large and mid-sized developed market stocks excluding those from the U.S. and Canada.  Returns reflect the reinvestment of dividends and foreign withholding taxes and are translated into U.S. Dollars.  The index does not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The MSCI EM Index NR USD is a market capitalization weighted index which represents the broad market for large and mid-sized developing market stocks.  Returns reflect the reinvestment of dividends and foreign withholding taxes and are translated into U.S. Dollars.  The index does not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The Bloomberg Barclays U.S. Agg Bond Index is a market capitalization weighted index which represents the broad market for taxable investment grade U.S. dollar-denominated bonds. Returns reflect the reinvestment of interest and do not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.
  • The US Treasury Bill Auction Avg 1-month is an index comprised of short-term U.S. government-issued investments with yields collected weekly and can be considered a proxy for cash.  The index does not include advisory fees; the index returns would have been lower if advisory fees had been deducted. The index is not directly comparable to an Opes portfolio. Past performance may not be indicative of future results.

 

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however, Opes cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.Opes does not provide tax or legal advice, and nothing contained in these materials should be taken as such. As always please remember investing involves risk and possible loss of principal capital. Advisory services are only offered to clients or prospective clients where Opes and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Opes unless a client service agreement is in place