Market Commentary Q2 2019

The markets keep rolling along. Every asset class finished the first half of 2019 with gains.

After a rough May, stocks rebounded in June and the S&P 500 index (U.S. Large Cap stocks) turned in its best first-half performance since 1997. Real estate stocks continued their winning streak, as well, with both U.S. and Global REITs up 16-17% year-to-date. During the same time, U.S. Core bonds were up over 6% and Foreign and Emerging market stocks gained 14% and 11%, respectively. Even commodities participated in the rally, earning 5% over the first six months of 2019.

Bond and stock investors have diverging views of the U.S. economy. In June, the Federal Reserve discarded their “patient” stance and hinted they would lower rates by year-end. There are two ways to interpret this news: U.S. bond investors have focused on a looming recession, continued low inflation, and possible interest rate cuts. The demand for bonds has significantly lowered bond yields. U.S. stock investors, on the other hand, have viewed mixed economic indicators through rose?colored glasses, are anticipating an end to the trade wars and have driven stock returns to record levels. Only time will tell who is correct.

U.S. Large Cap Stocks 18.5% U.S. Aggregate Bonds 6.1% Global Real Estate 16.2%
U.S. Small Cap Stocks 17.0% International Bonds 5.4% Allocation 30%-50% Equity  9.8%
Overseas Stocks  14.0% Commodities  5.1% Allocation 50%-70% Equity 12.2%
Emerging Market Stocks 10.6% U.S. Real Estate 17.1% Allocation 70%-85% Equity 13.6%

Economic Outlook

The U.S. economy is slowing down.

In July, the current U.S. economic expansion became the longest in U.S. history. However, signs of slowing momentum continue to mount as evidenced by the gradual decline in the annualized U.S. Gross Domestic Product (GDP) figures for the past 12 months:

2018 – Q1: 2.2%, Q2: 4.2%, Q3: 3.4%, Q4: 2.2%
2019 – Q1: 3.1%, Q2: Various analyst estimates for 2nd quarter 2019 GDP are still positive but in the sub-2% range.

Global economic growth is slowing, as well.

Like the slowing U.S. economy, global economic growth projections continue to be revised downward due to threatened tariffs, or those already in place, driving reductions in trade. Brexit (the divorce between the United Kingdom and the European Union) and its October deadline have also raised trade worries in the European markets. In response, global central banks have begun to lower interest rates and/or ease financial conditions. Despite the short-term risks, however, attractive valuations suggest that investments in European and emerging-market stocks will still significantly outperform U.S. stocks over the next five to 10 years.

Global economic reports continue to be mixed but you can count on the media to focus on the bad news. Recessions and their corresponding market declines are inevitable, but it is impossible to forecast when a recession will hit. We will continue to monitor the economic and market environments for you and will adjust as needed.

*U.S. Large Cap=S&P 500, U.S. Small Cap=Russell 2000, Overseas Stocks=MSCI EAFE, Emerging Market Stocks=MSCI Emerging Markets, U.S. Bonds=Barclays Aggregate Bond Index, International Bonds=FTSE WGBI, Commodities=Bloomberg Commodity, US Real Estate=MSCI US REIT, Global Real Estate=S&P Global REIT: Data Source: Morningstar®. Economic Data: Litman Gregory Analytics and Vanguard Investments. Allocations=Morningstar® U.S. Fund Allocation Categories: Data Source: Morningstar®. Tax Planning Data Source: KPMG 2019 Tax Planning Guide. 1“Important”: Body.html, 2 Index returns are for illustrative purposes only and do not represent actual performance of any investment. Client returns will differ from the results shown. Index performance returns do not include any management fees, transaction costs or expenses. The performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate; thus an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than return data quoted herein. Indexes are unmanaged and one cannot invest directly in an index. Please review your allocation regularly and notify BFA immediately if your circumstances should change.