Q2 2019 Review Q2 \ 2019 Review

$Q2 2019 Review Q2 \ 2019 Review$

2019

Q2 2019 REVIEW Q2 \ 2019 REVIEW

THE STORY WAS INTEREST RATES EARNINGS BETTER THAN EXPECTED The story of the quarter was the story of interest rates Second quarter earnings were better than expected with and the U.S. Federal Reserve. In a little more than six many companies exceeding (previously lowered) analyst months, the market has gone from expecting the Fed to expectations. Unemployment reached a near 50-year lift rates to anticipating a minimum of one—and possibly low while wages demonstrated modest growth, providing as many as three—rate cuts this year. support for the consumer to continue to spend. Towards the end of April, the S&P 500 was on course for the best Much of the economic data was mixed throughout 2Q, four-month start to the year in more than three decades. not surprising given all the cross-winds. The quarter started on an up note, with the S&P 500 climbing more But, even as the markets were rising, data in the U.S. and than 2% on positive news out of China and a strong elsewhere were starting to show some signs of weakness, U.S. jobs report. The major issues that have continued suggesting that the failure to solve the China – U.S. trade to bedevil global markets – China trade and Brexit – conundrum was beginning to filter through to the real were around then, too, but there was a higher level of world. The month of May saw stocks retreat, with the optimism that something would be resolved, at least with S&P 500 down around 6% on the month. At the same China. The yield on the 2-year Treasury stood at 2.33% on time, 1Q GDP came in well above estimates, up 3.2% May 3; for the 10-year Treasury, that number was 2.53%. compared to expectations of around 2.3%. Inflation, as measured by Personal Consumption Expenditures (PCE), stayed well below the Fed’s 2.0% US Treasury Yields during Q2 target, at 1.6% in May, supporting the Fed’s then “watch 2.6CHART 2: S&P 500 PERFORMANCE, 2018 2.75 and wait” position on interest rates. The big news for the month was the unravelling of the trade talks with China, with new tariffs announced by President 2.4 2.55 Trump in a weekend tweet. Threats escalated on both sides, and markets were rattled; though, in the U.S., at least, the economic fundamentals remained relatively 2.2 2.35 strong. Homebuilder sentiment rose to a seven-month FPO high. Housing starts climbed more than expected, and 2 2.15 consumer sentiment, as measured by the University of Michigan survey, rose to the highest level in 15 years;

Charts source: Bloomberg however, retail sales were weak, based on slowing Charts source: Bloomberg 1.8 1.95 demand for autos.

Earnings season ended on a positive note, as earnings for 1.6 1.75 the S&P 500 climbed 1.8% in 1Q, well ahead of the -3.0% 3/29 4/5 4/12 4/19 4/26 5/3 5/10 5/17 5/24 5/31 6/7 6/14 6/21 6/28 that was projected. Nonetheless, U.S. equity markets U.S. 2 Year Treasury U.S. 10 Year Treasury remained unsettled, declining for four weeks in a row through the end of May.

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BOND YIELDS FALL MARKETS RALLY Treasuries generally rallied in the face of all this Heading into the end of the second quarter, some uncertainty; bond yields fell, and the yield curve inverted uncertainty had begun to materialize regarding the G20 again. The Fed was given something more to think meeting between President Trump and President Xi. about in late May when President Trump unexpectedly But on June 18th, President Trump tweeted that the two threatened to levy tariffs on Mexico in a weekend tweet. leaders had agreed to an “extended” conversation at the Unusually, this had less to do with economics than with conference. Markets rallied strongly on the news. The immigration policy, and it threatened to severely disrupt following day, the Fed announced that it would leave markets and billions of dollars in cross-border trade. rates unchanged, but showed a definite bias towards cutting rates later in the year if needed. They removed th On June 4 , Federal Reserve Chairman Powell gave a the word “patient” from their statement, in reference to speech indicating that the Fed was closely monitoring rate policy. Following this, markets continued to head the impact of trade on the economy and would be higher, even as the yield on the 10-year Treasury fell willing to “act as appropriate” on rates. The stock below 2.0% for the first time since 2016. market responded positively to his remarks, climbing more than 2% on the day. Ultimately, the Mexico Stocks closed out June up 17% year to date, as situation was resolved, at least temporarily, allowing measured by the S&P 500—the best first half in 22 President Trump to declare victory. The trade policy years. For the second quarter, the S&P 500 was up 3.8%. uncertainty lingered, however. Other data continued to be mixed. New home sales fell in June, and consumer confidence dropped to its lowest Heading into the second half of June, the U.S. economy level since September 2017 as the uncertain resolution continued to soldier on; though, both manufacturing to the trade conflicts continued to take a toll. But the activity and job growth showed signs of slowing. Retail trade situation took a turn for the better at month’s end sales were strong, however, suggesting that consumers as Presidents Trump and Xi, meeting at the G20, agreed were still prepared to spend. The Atlanta Fed marked to resume trade talks and the U.S. lifted restrictions on up its GDP Now predictions for the second quarter in China’s Huawei. mid-month, from 1.4% growth to 2.1%. The economic expansion, now the longest, if not the But the Fed and its fellow Central Banks around the strongest, on record, looks set to continue. world continued to be the story. As of mid-June, investors were assigning an 83% chance that a cut in Fed Funds was in the offing at the September Fed meeting. The European Central Bank suggested that it, too, was prepared to cut rates. For its part, the Bank of England cut its Q2 growth forecast for Britain’s economy to zero and kept rates steady.

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