Quarterly Newsletter for the 2nd Quarter 2019
Despite the pullback in May, the equity markets here and around the world are showing positive returns so far this year. As of June 30th, the Dow Jones Industrial Average (DJIA) was up 14.03%, the Standard and Poor 500 (S&P 500) was up 17.35% and the NASDAQ was up 20.66%. Overseas, the MSCI all Country World ex-US Index gained 11.63% and the MSCI Emerging Market Index was up 7.44%. In the fixed income environment, the Barclays 1-3 year US Government/ Credit Index showed gains of 2.71%.
Fixed Income Market (Bonds): As you may recall from our past newsletters, throughout most of 2018 the Fed was “hawkish”- telegraphing the probability of several rate increases in both 2018 and 2019. The last increase was in December of 2018. This was quickly followed by a change in Fed commentary as they became “dovish” (backing off on the number of planned rate hikes). As we publish this newsletter, Jerome Powell, Chairman of the Federal Reserve, finished his testimony in front of Congress and indicated that the Fed may, in fact, lower interest at its July meeting. This is, according to many experts, an insurance policy intended to support the strong US economy and spur economic growth overseas. We view this as a positive. Should we get a rate decrease, bond values will increase (again, bond values have an inverse reaction to interest movements). If we do not get a rate decrease, the mere fact that it was considered is a signal the Fed has little desire to raise rates in the near future.
US Equity Market (Stocks): In July, we entered the eleventh year of the US economic expansion. This officially qualifies as the longest expansion in modern history. One of the key factors supporting this growth is DPI (Disposable Personal Income). As a note, DPI includes wages and benefits paid to employees as well as interest, dividends, rental income and Social Security payments. Of interest is the fact that DPI (consumer spending) makes up 70% of the US economy. DPI is strong and is rising at a steady pace. This is needed to support the continuation of our economic expansion. Despite the real financial strength of the American consumer, they have not become overconfident. While they are optimistic, the consumer sentiment index is far below the levels that proceeded the irrationally exuberant period before the tech bubble of 1999.
The above, coupled with other strong economic indicators, such as low unemployment, increases in the participation rate (unemployed individuals reentering the work force), strong corporate earnings, a positive housing market, low inflation, and no threat of a recession all adds up to a continuation of a strong US stock market.
Overseas Markets (Foreign Stocks): The Overseas markets have not changed much since our last newsletter. It appears that the “trade wars” are not as harmful as many thought they might be and there is currently a truce between China and the US regarding additional tariffs. This is, obviously, a positive. BREXIT is still an issue and many overseas economies are still sluggish- in need of a catalyst to spur their recovery.
Conclusion: The US equity (stock) markets will probably be somewhat volatile but we are still positive regarding their future- especially large cap stocks. In the Overseas equity (stock) market and the Emerging market we remain neutral to positive and feel that we could see significant growth in this area if/when we get a resolution to the trade wars. The fixed income (bond) environment is more stable with the Feds considering rates cuts; thus, we are positive about bonds- especially the intermediate bonds funds. A small exposure to long term bond funds may be appropriate until interest rates begin to rise.
Permit us to express our sincere appreciation for the opportunity to be of service to you. As always, should you have any questions or wish to discuss the above in more detail, please do not hesitate to contact us.