Financial Forum July 2019
Market Commentary – Stocks Remain Resilient Despite Rising Volatility
Volatility returned in the second quarter, as uncertainty regarding U.S.-China trade relations, future Federal Reserve interest rate policy, and the state of the U.S. and global economies was front and center. The S&P 500 logged a 4% gain in April thanks to solid first quarter corporate earnings reports, then pulled back more than 6% in May, as President Trump raised tariffs from 10% to 25% on $200 billion in Chinese goods following the collapse of U.S.-China trade negotiations. In June, however, the stock market was able to find support and rebound strongly as there was progress across the two main sources of volatility - U.S.-China trade and future Fed interest rate policy. At the June 19th meeting, the Federal Reserve reversed course from May and signaled an interest rate cut is likely in 2019, perhaps as early as July. That shift helped to re-validate market expectations of lower interest rates in the near future, and stocks rebounded strongly on that expectation. Second, President Trump and Chinese President Xi Jinping agreed to meet at the recently held G20 meeting, and the result of the meeting was a trade “truce” of no new tariffs while trade negotiations resume. As a result of these developments, the first half of 2019 turned out to be a profitable venture for both stock and bond investors. Of course, the next riddle for investors to solve is, “What’s next?”
Third Quarter Market Outlook
Markets were impressively resilient in the second quarter and registered gains despite deterioration in global economic activity and renewed uncertainty with U.S.-China trade. But, our years of experience have taught us not to become complacent just because markets have been resilient, and we think that’s again appropriate as we start the second half of the year. Reductions in interest rates by the Federal Reserve, while welcome, are not a panacea for the U.S. and global economies. And as we start the third quarter, we face macroeconomic uncertainty on multiple fronts. First, the U.S.-China trade situation remains delicate and very uncertain, and until there is a final agreement on a new U.S.-China trade pact, that lack of clarity will act as a headwind on economic growth and likely create temporary periods of volatility like we experienced in the second quarter.
Looking at the global economy, growth metrics underwhelmed in the second quarter, although the impact on global stocks was muted by rising market expectations of more stimulus from global central banks, including the Fed. But, if we see further deterioration in global and U.S economic indicators, that will also likely be a source of elevated volatility across markets. Additionally, there are several unsettled geopolitical situations that must be monitored, including Brexit (the deadline is October 31st), North Korea (relations are still unsettled despite the recent Trump/Kim meeting) and Iran (the chances of a U.S.-Iran military conflict are as high as they’ve been in years). Finally, while the Federal Reserve has signaled it will begin to reduce interest rates in the coming months, the situation remains very fluid, and if the Fed does not meet market expectations by cutting rates, that will cause short-term volatility.
Bottom Line: It remains unclear how, or when, these events will be resolved, and what those implications will be for markets. Yet as 2019 has shown us so far, uncertainty is not, by itself, enough to offset the still-strong (but declining) fundamentals in the U.S. economy and corporate America. At the end of the day, it is core economic and corporate fundamentals that drive market returns—not the latest sensational headlines. If markets want to continue their march higher, we’re going to need 1.) A solid second quarter earnings season (reports start next week), 2.) Stabilization of global growth, 3.) A confirmation of multiple future Fed rate cuts, 4.) No more trade drama (i.e. Mexico or the European Union), and 5.) A U.S.-China trade deal. Rest assured, we will be closely monitoring these events.
Wealth Management – Interesting Tidbits from Around the World of Finance
Are super large cap stocks doing the heavy lifting? According to Bloomberg, the difference between a small number of global mega-cap stocks and the majority of smaller companies that make up the world market is stark – and ominous. An analysis of the Bloomberg World Index shows companies worth over $100 billion make up just 2.4% of members and have had the highest median return over the last 12 months, at 15%. Those valued between $5 billion and $50 billion had a median performance of 4.8%, while firms between $1 billion and $5 billion showed a loss of 3.8%. The latter two groups, however, make up 87% of the global gauge. The data shows a worrying concentration of return dependency. Markets are healthier when the majority of names are doing well. The increased likelihood of easier monetary policy from major central banks has lifted market indexes in recent months, despite signs of a slowing global economy. Scratching below the surface shows the rising tide is not lifting all boats.
Not saving enough…According to the World Economic Forum, the average 65-year old American male has accumulated retirement savings that will sustain him until age 75 (10 years). The problem: his life expectancy is to 83. This study assumed that male retirees would need retirement income of 70% of their pre-retirement pay – a reasonable assumption in my book.
We make things…As of December 31, 2018, U.S. manufacturers employed 12.8 million workers, almost identical to the 12.9 million manufacturing jobs in the country as of December 31, 1941, or 77 years earlier. According to the Department of Labor, 264,000 new manufacturing jobs were added in 2018, the most in 21 years.
Tightening supplies…According to Rystad Energy, OPEC produced 29.9 million barrels of oil per day in May 2019, the cartel’s lowest monthly production in more than five years and 2.6 million barrels a day below the 32.5 million barrels a day produced just seven months earlier in October 2018.
Quarterly Thought – Happy Fourth of July!
When the Continental Congress approved the Declaration of Independence on July 4, 1776, the population of the 13 colonies was 2.5 million, equal to the population of Houston today.
My, have we grown! Happy 4th to all.
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