2Q19 Insights

On June 30, 2019 stocks finished one of the best six-month periods in decades.  After a tough May (S&P 500 down 6.6%), June turned out to be the best June since 1955.  The magnitude of the six-month returns is shown in the table.  Given the global trade issues and the other uncertainties present during the first half of the year, these returns are very remarkable.  This bull market in stocks continues to be one of the most unbelieved in recent memory.

For all the good things going on, many investors can’t seem to enjoy themselves. Rarely has there been so much stock market pessimism at the same time as the U.S. stock market is making new highs and the coincident indicators of real U.S. economic growth are performing in an acceptable fashion.  In addition to the economic coincident indicators behaving nicely, low inflationary expectations and strong profits make it difficult to see a recession any time soon in the U.S

Part of the fuel for the stock rally is the continuing low level of interest rates and, lately, the indication from the Federal Reserve Bank that interest rate cuts may be needed soon, as early as the end of July.  Bond returns for the first six months ranged from 1.24% for the 91-day Treasury Bill to 6.35% for the 3-5-year Merrill Lynch Corporate bond index.

We remain fully invested in equities (as we have been for quite some time) owing to the following factors:

– From a contrarian viewpoint, money flows out of stocks YTD are $51.8 billion, while flows into bond funds and money market funds are a positive $278.4 billion. Investors in general appear to be under invested in stocks.

– 2^nd Quarter earnings reports are surprising to the upside again (companies and analysts guided expectations too low after robust 1^st earnings).

– Inflation expectations continue to be well-anchored and long-term interest rates are historically low.

– Monetary policy remains accommodative, with one or more rate cuts expected this year.

– Economic growth is expected to stay in the 2-3% real range in 2019/2020.