The second quarter ended with stocks and bonds fairly flat for the year overall. Although, there was no shortage of headlines. On the economic front, the dominating issue has been trade wars, and the market reacted very strongly to tariff announcements and potential retaliatory measures. This issue runs the risk of stymieing economic growth since uncertainty could delay capital investment. However, generally the economy continues to improve. Job growth is still strong, and for the first time since 2000 there are more job openings than those looking for work. The tight job market has helped nudge inflation above the Federal Reserve’s target of 2%. The summit with North Korea also provided some relief for the stock market as global political tensions eased a bit.
Through the first six months of the year, Global Stocks have returned a positive 1.1%. US Stocks, as measured by the Russell 3000, are up 3.2%. Small cap US stocks were the best overall performer, gaining almost 8%. In the US, the Growth over Value theme continued to play out in the quarter, making growth stocks even more relatively expensive. International stocks lagged, with the MSCI ACWI ex-US declining 2.8%. The worst performing stock category was Emerging Markets, which lost over 6% during the first half of the year. Emerging Market stocks were a strong performer last year, but trade war rhetoric has weighed on them this year. In particular, China’s stock market has entered bear market territory, declining over 20% from its peak. The trade spat is something that has the potential to disrupt global equity markets.
Rising interest rates have also contributed to the muted performance of bonds this year, given the inverse relationship between rates and bond prices. As measured by the Bloomberg Barclays US Aggregate index, bonds were down 1.7% through the first six months. The Fed has hiked interest rates twice this year for a total of seven times since they began raising rates in December 2015. Historically, rising interest rates have led to the increased likelihood of a recession. As we have written previously, valuation for the stock market is elevated and interest rates are a component of that. If rates continue to increase, this will likely pressure stock prices.
Whatever market environment we encounter, we will continue to maintain our disciplined approach to managing your portfolio; targeting rebalancing opportunities when they may arise, seeking investments trading below their intrinsic value, and owning assets that are less correlated with the overall stock and bond markets.