MARKET BRIEFS: Q2 RECAP AND Q3 OUTLOOK

What does the bond market know that the stock market doesn't?   |   Market Review Q2 2019   |   What To Expect When They’re Expecting

Background

Global economic growth has unquestionably slowed. This is frequently blamed on the uncertainty created by tariffs and trade disputes, but given that we are now late in the longest economic expansion on record, slowing growth should hardly be a surprise. While tariffs are not to be singled out to blame for slowing growth, hobbling our suppliers and clients with tariffs only worsens a weak global growth environment. The IMF has slashed its growth forecast for the eurozone and not only have export-driven economies, such as Germany’s, been particularly slowed, but the effects are now also starting to spread out to their neighbors.

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• Equities finished the quarter in strong fashion with returns for each of the major markets above 6% in June, lifting year-to-date returns into double digits. Bonds also saw solid returns in the quarter with each of the major markets seeing a return above 3%, lifting year-to-date returns above 5%.
• Within equities, US provided the strongest returns for the quarter and year-to-date at 4.3% and 18.5% respectively. International developed was generally on par with the US markets for the quarter, helped by a weaker dollar, but trailed by 4% year-to-date. Emerging market equities saw the weakest relative returns, and China saw negative returns in the quarter as trade tensions rose.
• By sector, technology and consumer discretionary were the top two sectors year-to-date lifting the returns of the growth indices. Mid-cap growth saw a return of 26.1% for the first half of the year leading the style pack while small-cap value trailed with a return of 13.5%.

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The story
At its June 2019 meeting, the Federal Open Market Committee (FOMC) left the fed funds target range unchanged. Despite a significant shift in the language in the official statement released after the meeting and the expectations of FOMC participants in the “dot plot” portion of the updated Summary of Economic Projections, Fed Chair Powell sought to downplay the certainty of a rate cut in the near future. He promised that the FOMC would “act as appropriate” with a nod towards data dependence (“will closely monitor the implications of incoming information”).

The reality
If Powell plans to do anything other than cut rates in the next few months, he has some serious work to do in the meantime. There was one dissenting vote on the FOMC in June and based on the dot plot, nearly half of the Committee (not all are voting members at this time) is projecting a cut this year.

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