To Our Valued Clients,
After a volatile second quarter of 2019, US equities reached an all-time high on July 1st after President Donald Trump and Chinese President Xi Jinping agreed not to impose new levies on US and Chinese goods after meeting on the sidelines of the G-20 summit in Osaka, Japan on June 29th. Despite uncertainties surrounding global trade and central bank policy, the S&P 500 Index rallied more than 17% to start off 2019, notching its best first half in more than 20 years. The surge in equities came after stocks recovered in June from a lackluster May performance. The Dow Jones Industrial Average soared 7.2% in June, its biggest gain for that month since 1938. Meanwhile, the S&P 500 rose 7.9% for the month, marking its best June performance since 1955.
This month marks the 121st month of the economic expansion arising out of the great financial crisis, marking it the longest expansionary run on record going back to 1854, according to the National Bureau of Economic Research. However, likely due to the overhang of the housing crisis, this run has been weaker than past expansions in total. The cumulative total of quarterly GDP growth equals 25%, far lower than previous booms. For example, the second longest expansion occurred between 1991 and 2001 and enjoyed a cumulative GDP growth of 42.6%. While the unemployment rate has dropped to 3.6% in May, the lowest since 1969, job growth has been relatively slower than during other post-war recoveries. Despite some geopolitical risks and several slowing economic indicators, the current expansion continues on, getting its latest boost from the Trump tax cut of 2018 along with a relaxation in business regulations. However, the endurance of the expansion from this point on will depend largely on global trade resolutions and central bank policy.
Many market participants anticipate Chairman Jay Powell and the Federal Reserve to cut interest rates during its July meeting, which is a big shift from six months ago. However, the recent easing of trade fears from the developments at the G-20 meeting in Osaka at the end of June, along with any other productive trade talks will likely be supportive of economic growth in the second half of the year, allowing the Fed to stay on hold. Conversely, should trade clouds remain on the horizon or worsen, the Fed will likely cut rates in 2019 to help support economic growth. So far, the effects of the trade disputes on the US economy appear modest, but the Fed will continue to monitor the effects of the disputes on markets as well as business and consumer confidence.
The macroeconomic backdrop still looks fundamentally strong and global consumers remain an important bright spot. Unemployment rates in most major economies are still quite low, and real wage growth has accelerated due to a lower supply of available workers and decreasing rates of inflation. Considering this fundamental backdrop, equity valuations in most areas still look reasonable, historically. Moving to fixed income, despite fears over yield-curve inversions, the Fed has recently signaled a more accommodative stance to monetary policy, and we believe the economic growth environment to remain stable. But, as mentioned, trade war rhetoric and potentially complicated Brexit negotiations will likely cause interest rates and credit markets to remain volatile in the near term. An inverted yield curve, trade-war uncertainty and trending weakness in global economic data remain our primary risks. While, US Federal Reserve monetary easing, Chinese economic stimulus and a US-China trade deal could provide further expansionary support. Thus, we view the landscape with continued uncertainty and, therefore, continue to stress diversification amongst asset classes and strategies. As always, we believe in the importance of a long-term investment mindset to guide our decisions.
As we head into the third quarter of 2019, we wish you and your families a happy and prosperous Summer season. We thank you for your ongoing trust and confidence, and hope we can continue to help you discover The Next Piece – to Your Peace of Mind. ™
Josh Williford, MSF
Director, Empowered Investor
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