Summer has arrived, and with it, the return of long, hazy days, filled with lazing by the pool, or on the beach, or at the lake. A sense of peace and calm, that things are just right in the world. Wishful thinking? Perhaps. But over the past couple of months, the markets and economy have been in that quasi-“Goldilocks” zone, where they haven’t been too hot or too cold, but more or less just right.
The first half of the year saw the markets face some volatility, but also continue to bubble higher. The economy had a great first quarter (GDP up 3.1%) that surprised just about everyone, but slowed somewhat in the second quarter (data hasn’t been released yet, but expectations have GDP up between 1.5% and 2%). The issues facing the economy haven’t changed much over the past six months, and with the warm weather now here, many would undoubtedly prefer to let their thoughts drift to sunnier topics than market volatility. But will that be possible? Well, let’s see.
June gained back much of what May gave up, as the DJIA is up 15.40%, year to date. The S&P 500 also had a great month, and is now up 18.54% YTD, with the other equity indices similarly following suit. The big winners, however, were the indices mirroring the bond market. The Barclays U.S. Aggregate Index is now up 6.11% YTD (vs. 2.97% at the end of April), as a flight to quality and the threat – or perhaps, prospect? – of a rate cut has driven bond prices higher. Economic data was basically steady as she goes, with unemployment and inflation both staying about where they have been for most of this year. (Please see the end of this commentary for information as to how various indexes have performed in 2019.)
The first half of 2019 has seen a relief rally, a period of FOMO, and a prove-it rally. What hasn’t been seen (yet) is a melt-up or a melt-down, which is probably good news for all. The relief rally occurred in January, as the markets rebounded from the 4th quarter of 2018 and investors finally exhaled upon the realization that the economy wasn’t sinking into a recession and a bear market. As winter progressed toward spring, FOMO set in for many, and enough brave souls threw chips into the pot to drive the markets higher. There was no market melt-up during this period, because there was enough to be concerned about economically that investors kept a large portion of their funds on the sidelines. There’s been a prove-it rally, as investors wait upon policymakers, corporate earnings reports, and other economic events to prove that putting their money at risk is worth it. Fluctuating announcements from the Fed, earnings uncertainty, the usual flare-ups in trade, and other issues have all contributed to the market volatility experienced over the past couple of months. Prove-it rallies tend to be more volatile, and that will likely continue to play out over the summer, as many investors attempt to enjoy the doldrums.
The issues facing investors sound like a broken record: track one, GDP; track two, the Fed; track three, trade: track four, tensions with the Middle East tensions; track five, taxes; track six, politics; and track seven, corporate earnings. Heard that album before, have you? That is precisely why this is a period of doldrums: the news just hasn’t changed that much. Yes, the story behind GDP has been mixed up a bit this year, with strength shown in the first quarter; ultimately, though, expectations for the year haven’t changed a whole lot.
Corporate earnings – track seven on the aforementioned economic album – have been a bit of a conundrum this year, feeding the prove-it rally. Entering 2019, many expected that first-quarter earnings would trail last year, but still post gains. Then, expectations shifted to earnings picking up as the year went on, helping to sustain the bull market. While first-quarter earnings generally were fine, second-quarter earnings may be under some pressure. A recent article on CNBC.com pointed out that some 77% of companies that have issued pre-announcements have said that “their profit picture will be worse than Wall Street is expecting.” While this is a small sample, it does reflect some of the current uncertainty, due to tariffs and other concerns. The same article also points out, though, that the U.S. is still expected to outpace the rest of the world.
Looking past the short-term data, the long-term picture remains positive. While earnings may be an issue this summer, many of the same factors that have existed for the past several quarters remain at work, and markets are expected to react accordingly. That may mean more months like May and June moving forward, with the looming presidential election likely playing a greater role as time goes by. The bull market and economic expansion have some more room to run, albeit, perhaps, at a slower pace.
The year is now halfway through – where does the time go? – and there’s no better time to call our Wealth Management Group, to schedule a portfolio update and review your goals, objectives, and risk tolerance.