Economic Update Q2 2019

Stock Markets Performance This slide shows the total returns for key markets in the US and abroad. Stocks posted positive returns across the board but showed increased volatility compared with the first quarter of the year. Financial stocks helped the S&P 500 outpace the tech heavy Nasdaq in the USA. Developed countries around the world paced close to USA returns while emerging markets lagged.

US Sector Performance Q2 2019 was positive for all US stock sectors save Energy which was hampered by a decline in oil prices.. The 3 “super” sectors, Cyclical, Sensitive, and Defensive, describe how the sectors tend to react to economic cycles. Cyclical sectors tend to be very correlated with economic cycles while Defensive sectors are more resilient to slowdowns but may underperform in bullish times. Sensitive sectors are less affected by economic cycles than Cyclical Sectors, but also have offered less safety than Defensive sectors during economic downturns. Overweighting Cyclical and/or Sensitive Sectors could make sense if bullish on the economy; conversely, overweighting Defensive stocks could be a strategy to employ if concerned about economic slowdown. After lagging in Q1, financial stocks returned the biggest gains in Q2.

Asset Class Performance – Trailing Periods Domestic growth tilted stocks posted the highest returns of these asset classes in Q2. Real estate slowed this quarter but still has posted impressive gains YTD and over the trailing 1-year period. Bonds, which are lagging YTD, outgained some traditionally riskier asset classes in the more volatile Q2. The only major asset class to post losses this past quarter was commodities which have also lagged over longer term periods. Growth has outpaced value in every time frame over the last 5 years save the last month of Q2, 2019. Small cap stocks have similarly underperformed larger ones and emerging markets have lagged developed. Growth has been the only “risk-on” factor to overperform in the 5-year period shown in this table.

Asset Class Performance – Quarter by Quarter Similar to the table on the prior slide, however, this view shows the performance of each asset class for each of the last 12 calendar quarters. With very few negative quarters for equity categories over the last few years, bonds have provided the lowest returns many quarters since 2016 but have tended to provide positive returns when stocks do not.

Housing Indicators Declining mortgage rates and seasonality added a lift to housing data in Q2. Building permits, housing starts, home sale prices, and pending sales all saw increases QoQ while the number of new houses sold declined.

Interest Rates The short end of the yield curve remains inverted as rates have moved even lower across the entire curve. The 10y treasury ended the quarter at it’s lowest yield since 2016. The flattening of the yield curve while bond prices are increasing (also called a “bull flattening”) is typically a positive indicator for the economy. However, the inverted yields have many investors concerned as that phenomena has preceded recessions in the past. Recall, however, that last time we saw an inverted yield curve indicate a recession the 10y note was a full 2.5 points higher than it ended Q2.

Trade & Dollar Strength

US Trade Focus – China & OPEC

Consumer Behavior

Employment & Wages Unemployment rates continue to decline and remain historically very low. Average wages continue to stay strong and have outpaced CPI and economic growth. This chart illustrates the strength in these indicators since the latest recession. If labor continues to become more expensive it may require more economic growth to maintain the low unemployment rate.

Leading Indicator Summary & Trends

In The News in Q2 Two major talking points in Q2 have been the return of Bitcoin and other cryptocurrencies, as well as the trade tensions between US and China. Although there have been many different opinions on Bitcoin, one thing for certain is that the major cryptocurrency is up 173% YTD as you can see in the chart above. Trade tensions between US and China brought back some volatility in the markets as the exchange rate rose to almost 7 US Dollars/Chinese Yuan.

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