Volatility Has Returned, Yet Markets Have Been Resilient
The steady gains of early 2019 are more variable now.
After a strong first quarter historically-typical volatility has returned, driven by uncertainty. U.S.-China trade relations, the Federal Reserve’s interest rate policy and the state of the world’s economies caused a May pullback of more than 6% in the S&P 500. Stocks broadly recovered in June and finished the quarter strongly positive for the year.
2nd Quarter Performance Review
The S&P 500 logged a new all-time high.
In sharp contrast to the quiet, steady gains of the first quarter, stock market performance in the second quarter was marked by extremes. The S&P 500 logged a 4% gain in April, thanks to solid first-quarter corporate earnings reports that quieted concerns that earnings growth might have peaked in 2018. Adding fuel to the bullish fire, investor expectation of a 2019 Fed rate cut rose, due in part to statistics that showed inflation well below the Fed’s target.
Jitters soon returned, as U.S.-China trade negotiations stalled. Investors were caught by surprise when President Trump announced via Twitter that he would be raising tariffs on $200 billion in Chinese goods from 10% to 25%. The president also threatened to levy additional tariffs on the remaining $325 billion worth of Chinese products imported into the United States.
Federal Reserve Chairman Jerome Powell increased investor uncertainty when he sowed doubts about future interest rate cuts. Describing current low inflation as “transitory,” he implied that the Fed was not as open to a rate cut as investors had anticipated.
This combination of factors weighed on markets throughout May. The S&P 500 fell to its lowest levels since early March, but was able to find support in June. Progress was made across the two main sources of recent volatility, U.S.-China trade and Fed interest rate policy.
At their June 19th meeting, the Federal Reserve reversed course and signaled that an interest rate cut in 2019 is likely, perhaps as early as July. Revived expectations of lower interest rates helped stocks rebound strongly.
President Trump and Chinese President Xi Jinping agreed to meet at the June G20 meeting, and announced that no new tariffs would be imposed now, and negotiations would resume. On June 20th, the S&P 500 reached an all-time high.
Even so, uncertainty regarding the global macroeconomic picture has increased since the beginning of the year. However, underlying fundamentals remain generally solid. Uneasiness about interest rate policy and U.S.-China trade has eased somewhat. All of this should be supportive of markets, and the outlook remains generally positive as we begin the second half of the year.
We expect macroeconomic uncertainty to continue for the near future.
Markets were impressively resilient in the second quarter and registered gains despite deterioration in global economic activity and renewed uncertainty with U.S.-China trade. However, our years of experience have taught us not to become complacent just because markets have been resilient, and we think that’s again appropriate in the second half of 2019.
The U.S.-China trade situation remains delicate and very uncertain. Until there is a final agreement on a new trade pact, the lack of clarity will act as a headwind on economic growth. Temporary periods of volatility are likely to continue until there is resolution.
Global economic growth metrics underwhelmed in the second quarter. While the impact on global stocks was muted by expectations of more stimulus from central banks and the Fed if we see further softening in economic indicators, that may cause elevated volatility.
Reductions in interest rates by the Federal Reserve, while welcome, are not a panacea for the U.S. and global economies. While the Federal Reserve has signaled it will begin to reduce interest rates in the coming months, the situation remains very fluid, and if the Fed does not meet market expectations by cutting rates, that will cause short-term volatility.
At Krilogy Financial, we understand that volatility, whether from a single disruptive event or a combination of factors as is presently the case, can be unnerving even if it is historically typical. We remain committed to helping you navigate this ever-changing market environment, with a focused eye on ensuring we continue to make progress on achieving your long-term financial goals.
Our years of experience in all types of markets, both calm and volatile, have taught us that successful investing remains a marathon, not a sprint. Therefore, it remains critical to stay invested, remain patient and stick to a plan. That’s why we’ve worked diligently with you to establish a personal allocation target based on your financial position, risk tolerance and investment time horizon.
After strong first-half returns, we understand that volatility can be especially unsettling. Thank you for your ongoing confidence and trust. Our entire team is dedicated to helping you successfully navigate this market environment and what comes after it.
Please do not hesitate to contact us with your questions and comments or to schedule a portfolio review.
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