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Q2 2019 | Market Update

All asset classes rose during the second quarter, as progress in U.S.-China trade negotiations and a newly dovish (accommodative) Federal Reserve buoyed investors. The S&P 500 hit a new high near the end of June. Large-cap U.S. stocks shot up 7.0% for the second quarter, and a remarkable 18.5% for 2019’s first half. Although emerging markets stocks were only up 0.8% for the second quarter, their first-half gains stand at 12.6%.

Fixed income also gained, as the 10-year Treasury yield fell below 2.0% on the heels of the Fed’s willingness to cut, rather than raise rates at their June meeting. When bond yields fall, their prices rise. The core bond index gained 3.0% for the quarter and 6.1% year-to-date. Floating-rate loans gained 1.7% for the quarter and 5.7% for the year.

A Mix of Risks Persists Could the second half of 2019 also deliver such positive returns? We don’t say “never,” just as we don’t rely on short-term predictions to drive our investing. The five-year outlook that influenced our views in January remains generally intact. However, risks to global markets have increased somewhat – including the potential escalation of a trade war and conflict with Iran – and with valuations even higher than they were, similarly robust second-half 2019 returns seem less likely.

The Fed’s changing stance and a shift toward loosening by other central banks, including the European Central Bank and stimulus by the People’s Bank of China, were a plus and this typically lifts global markets and asset prices. However, the market now generally anticipates at least one Fed rate cut during 2019. It’s possible that stock prices already fully reflect the impact of potential Fed rate cuts, so an actual rate cut may not have the power to lift prices further. And if the Fed fails to cut rates, that could potentially hurt stock prices as it rattles markets that were expecting more.

If global economies and markets turn negative, core bond holdings, other fixed income, and alternative investments may provide cushioning against broader stock market declines. In summary, we would like to revisit our philosophy of remaining steadfast with your investment plan regardless of the short-term market environment. The returns in the first six-months of 2019 were fantastic across many asset classes. There may be a sense of urgency to chase returns by increasing risk levels in your portfolio. However, stay true to your long-term objectives and remember, trying to time the market is not a prudent strategy.

As always, we appreciate the trust you place in us, and we continue to work hard each day to earn it.

Best regards,

Cory Nakamura, CFA, CFP®, PPC® Chief Investment Strategist

Certain material in this work is proprietary to and copyrighted by Litman Gregory Analytics and is used by Mosaic Pacific Investment Advisors with permission. Reproduction or distribution of this material is prohibited and all rights are reserved.

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