After suffering steep declines in the fourth quarter of 2018, US equity markets closed the first half and second quarter of 2019 at or near all-time highs. The global rally in fixed income markets continued as well. For the quarter ended June, the Dow Jones Industrial Average was up 3.21%, the Standard & Poors’ 500 Index appreciated 4.30% and the Nasdaq delivered a return of 3.87%. The Chinese markets did not participate in the gains while the European markets, for the most part, were up. Although crude oil prices declined nearly 10% during the quarter, gold prices moved up nine percent, piecing the $1,300/ounce level.
Global fixed income markets continued delivering attractive returns with yields falling considerably throughout the quarter as signs of a global economic slowdown started to emerge, first in Europe and then moving across the ‘pond’ to our nation. The US Treasury yield curve maintained its inversion out to the 10-year note, historically a sign of a future recession. However, it should be noted that such a sign is neither a perfect one nor one that can precisely pinpoint when such a recession would occur or how deep it may be. On the other hand, spreads on high yield bonds did not widened beyond what would be considered ‘normal’. Such a widening has been consistent with past recessions. Two-year Treasuries fell 51 basis points in yield with 10 year treasuries falling 40 basis points.
The Federal Open Market Committee (FOMC) continues to express concern regarding the state of the US economy and the implications of what a global slowdown may bring to America, due in large part to the on again-off again ‘Tariff Wars’. The second quarter signaled a considerable change in the Central Bank’s thinking from 2018’s year-end expectation of another 75 basis points of tightening in 2019. The “data dependent” FOMC appeared to indicate that interest rate increases in 2019 were unlikely. Apparently, the Federal Reserve has now achieved the ‘neutral’ zone in rates and needs to be ‘at-the-ready’ to lower rates during the second half of 2019!
In the American political theater, Congressional Democrats continued to battle the Administration over Presidential tax returns, the possibility of impeachment, the grave situation on the United States’ southern border, citizenship question on the 2020 census, etc. The two dozen or so Democratic Presidential contenders continue their electioneering this summer proposing multi-trillion dollar spending plans with reckless abandon. Will voters make these serious election issues? Will the House of Representatives continue to look for ways to impeach the President while the immigration crisis remains unaddressed? Will Congress approve the United StatesMexico-Canada agreement and possibly give President Trump a win? How will the tariff wars play out? Stay tuned – 2019 really is just the warmup to the 2020 election!