Q2 2019 Insights


What happened?

  • Global financial markets closed a second consecutive quarter of positive returns, though not without its fair share of noise and volatility.
  • Uncertainties surrounding tariffs and the reliability of existing trade agreements are starting to materially impact the economy.  Global manufacturing activity is down, inventories are rising, and businesses are postponing investment.
  • After dropping in May, equities and bonds rallied as the Federal Reserve hinted it would reverse course and cut interest rates.
  • Large-cap shares outperformed mid- and small-caps, while growth stocks surpassed value across all market capitalizations.
  • Equities in developed markets moved in sync with U.S. equities, but produced lower relative returns for the quarter.  Emerging market stocks advanced during the second quarter, but exhibited significant performance dispersion across the various regions.
  • Signs of weakening global growth, restrained inflation, and equity market volatility around trade talks resulted in strong performance across the fixed income asset class.


What are we doing?

  • While concerns about the end of the bull market abound, we still see strength in the U.S. expansion, albeit to a lesser degree than in the past.  It is important for investors to remember that missing the months prior to an equity market peak can be more painful than being invested in the months following the peak.
  • The U.S. stock market remains fairly-valued to slightly overvalued relative to long-term averages.  Where appropriate, we continue to rebalance from growth to value stocks, as well as to international equity.
  • We expect markets to remain choppy going forward, so we are taking advantage of the strong performance in equity markets to further rebalance client portfolios from equity to fixed income (where appropriate).
  • With rates so low, we do not believe investors are being adequately compensated for taking increased duration risk.  Therefore, our focus remains on short-term and flexible, unconstrained strategies.


What’s next?

  • Forecasts of global economic growth have fallen over the past few months.
  • That said, recession expectations for the U.S. in the near term remain muted, and there are signs China’s economy has stabilized.
  • Central banks around the globe are accommodating to offset trade uncertainties, but after years of extraordinary monetary policy, their arsenals are diminished.
  • We are wary of the lasting stimulative benefit of interest rate reductions this late in the economic cycle, especially given the prolonged environment of historically low rates.
  • Instead, we believe the catalyst for a rebound in global growth will come from the resolution of trade conflicts and the restoration of confidence in the world order.


Potential risks

  • Previous expansion killers have included prohibitively high interest rates, debt defaults, asset price bubbles, and high commodity prices.  We do not believe these typical suspects are a threat to this expansion.
  • Exogenous factors (natural disasters,  a conventional war, a global trade war, and the unintended consequences of extraordinary monetary policy) could be the eventual culprits.


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