Q2 2019 Market Summary

Monetary policy shifts have pushed interest rates to extremely low levels, providing liquidity to markets and pushing all financial assets higher. The second quarter ended with the S&P 500 Index just a percentage point below June’s record highs, and about 2% below our long-held target of 3,000, as growth stocks continued to outpace value. High dividend paying stocks did well in response to lower interest rates, but growth is still winning. International equity markets saw smaller gains. Bonds have generated significant positive returns this year, particularly among longer maturities, offsetting the impact of the rise in rates in 2018. Credit spreads tightened across the credit spectrum, generating strong returns particularly in the deeper credit and the high yield sectors.

Headline risks and uncertainty primarily relating to international growth and trade tensions have kept investors, and the Fed nervous despite continued solid domestic economic growth. Going forward, it will be up to earnings reports to support current equity market levels. Should the economy maintain current strength, interest rates should move back to a higher range, closer to equilibrium with the economy.

Please review our quarterly review for more detailed information on the economic and market environment. As always, we welcome your questions and comments. Please don’t hesitate to reach out to your advisor, should you want to discuss our outlook in greater detail.

Q1 2019 Market Summary

During the first quarter, the Fed made a significant reversal of monetary policy (from tightening to easing) to diminish the December rate hike. Equity markets responded with a full recovery, as did high yield bonds and emerging markets securities. Interest rates also fell, responding to a move to neutral rate policy. The Fed has since talked rates down, discussing the risk of global economic slowing – particularly in China and Europe. The lack of inflation has also limited the need to hike. Despite moderation abroad, temperate Q1 US economic statistics, and the rate environment, the US economy is on solid footing. A Fed ease in 2019 is unlikely.

The recovery in the equity markets has again been led by growth stocks including technology and consumer cyclicals. Strong employment and income combined with lower taxes, corporate investment and earnings may enable the equity markets to move higher, with interest rates moderating at higher levels. Many of the risks evident in the first quarter such as a trade agreement with China and a government shutdown have faded away or improved. Volatility should subside over the next quarter.

Please review our detailed quarterly overview for more information on the economic and market environment. As always, we welcome your questions and comments. Please don’t hesitate to reach out to your advisor, should you want to discuss our outlook in greater detail.

Q4 2018 Market Summary

After experiencing multi-year highs in the fourth quarter, equity markets “corrected”, pricing in a high probability of a recession and at least one Fed easing in 2019. Volatility returned to the market after a fourth Fed rate hike in December, ongoing international trade discussions, a moderation in global economic growth, and a change in Washington. 

However, this scenario seems unrealistic given the true economic and market fundamentals provided in our quarterly market overview. Amid the equity market correction and extreme widening of corporate risk premiums, the US economic fundamentals continue to impress with strong growth in employment, wages, consumption and investment.

Bonds had slightly positive returns in Q4 as investors sought safe haven assets, driving interest rates lower. The flight to quality drove high quality bonds such as Treasury and Mortgage Backed Securities back to positive returns for the year, while the widening in risk premiums pushed corporate bonds negative.

Going forward, strong employment and income together with lower taxes, stronger corporate investment and earnings may enable the economy and equity markets to withstand a higher interest rate environment. The recent drop in Oil prices may provide an economic stimulus via lower gas prices and input costs. Higher interest rates, trade agreements, Government shutdown, and geopolitical risks have increased market volatility but are likely to normalize as resolutions become clear.

Q3 2018 Market Summary

Our detailed quarterly market commentary is available here.

We saw continued strong corporate profits, healthy broad-based economic fundamentals, and steady stock market gains in the third quarter. Growth stocks remained the leader in the equity markets. However, after two quarters of strong market gains, we’ve experienced a rocky October to date amid investor concerns about interest rates, trade uncertainty, and reduced global growth expectations. We consider this to be a very normal part of the market cycle.

As we anticipated, the Federal Reserve increased its key policy rate by 0.25% in September. The new benchmark target rate is 2.00-2.25%, making it the eighth rate-hike since December 2015. The Federal Reserve indicated that it is also targeting one additional interest rate increase this year. We expect rates to move higher as the Fed removes its accommodative policy. For the quarter, longer-term US Treasury bonds posted significant negative returns, as is expected in a rising rate environment. Adjustable rate, corporate and high-yield bonds generated positive returns due to a lack of rate risk, higher income and/or tightening credit risk premiums.

As rates move higher, this will generate volatility in the equity markets. The good news is that we have a broad-based, strong economic foundation. This, along with lower tax rates, should sustain growth and investment, while providing support to credit quality and equity markets even in a higher rate environment.

Q2 2018 Market Summary

Our detailed quarterly commentary is available here

After a 10% market correction in the first quarter, markets were able to bounce back somewhat in the second quarter, recently reaching new record highs albeit with increased volatility. Growth stocks continue to lead the way. The broad-based, strong economic foundation coupled with corporate tax reform should sustain growth and investment, supporting the equity markets even in a higher rate environment. Corporate earnings will be challenged by higher input costs such as energy, labor and transportation. Political uncertainty surrounding trade relationships and threatened tariffs will potentially impact the consistency of the global economic growth environment.

Interest rates were also a concern for investors in the second quarter. Our outlook for rising interest rates remains in place, as the quarter saw yields on two-year notes rising to their highest level since 2008. Longer term rates have finally begun to rise as well. The Federal Reserve Board has become increasingly clear about removing the still accommodative policy through slow but regular rate hikes, and also by reducing the Fed’s Treasury and mortgage-backed security holdings. Rising interest rates generated negative returns across the bond market with the exception of floating rate securities.

As always, we will continue to assess both the risks and opportunities that present themselves in the second half of the year to remain well positioned in this dynamic market environment.

Q1 2018 Market Summary

Our detailed quarterly commentary is available here.

The first quarter of 2018 started off strong. The markets were supported by positive and broad-based economic data, solid corporate earnings reports, and the approval of a major tax reform package. However, February and March saw volatility sweep in as the likelihood of inflation became more realistic, and trade tariff concerns surfaced. After rising about 6% in January to record highs, equity markets suffered a 10% correction. We believe market volatility will continue as sentiment sorts out the benefits of tax cuts against the risks of international trade agreements, both within a rising rate environment.

On the fixed income side, we saw interest rate increases across all maturities. The 3-month Libor rose considerably, reflecting the actual and increased expectations of Fed tightening. The rate rise is being driven by (1) strong employment with newly apparent increasing wage pressures, (2) most key inflation measures moving to, and through 2%, (3) strong corporate earnings and equity market prices, (4) significant fiscal stimulus, (5) pro-growth policy shifts, and (6) global economic growth. Floating rate notes performed well in Q1 and over the past year as coupons adjusted upward with stable prices in the rising rate environment. Our fixed income portfolios benefitted significantly from our overweight position in floating rate notes.

As investors, we are seeing the positives of a growing economy and tax reform. However, the positives are coupled with some risks which include inflation and tariff/trade agreements. Our investment discipline is designed to take advantage of the opportunities that market risk and volatility create.



Q4 2017 Market Summary

As we have communicated previously, we have felt since early last year that the economic fundamentals were on solid ground and accelerating. This outlook has been bolstered by a strengthening corporate and consumer sector, and fiscal stimulus (passage of the tax package), giving the equity markets fundamental support.  Our interest rate strategy has been defensive, as we have felt the market was not pricing in enough tightening by the Fed and was underestimating the risk of rising long-term interest rates. As you will see in the attached market review and outlook (click here), we remain constructive on the markets in the long-term, but must consider the fact that interest rates will rise, will generate higher volatility and will challenge equity markets at times. 

Q3 2017 Market Summary

Click here for our detailed third quarter commentary. 

Economic growth and continued easy monetary policy propelled equity markets to record high levels, and tightened credit risk premiums in Q2. The US and Global economic growth has become broad based and continues along a steady moderate growth that may be self sustaining. The IMF recently raised its forecast for global growth to 3.7% in 2018. Risk was rewarded as growth-oriented stocks, along with European and Emerging markets were the better performers fore the quarter, while Corporate bonds, including High Yield and adjustable rate bonds, performed well. Short term interest rates rose to the highest levels since 2008 as the Federal Reserve confirmed plans to tighten a third time in 2017 and three more in 2018, and began to gradually reduce its balance sheet, unwinding QE.

Q2 2017 Market Summary

Click here for our detailed commentary for the second quarter.

Despite an uptick in volatility, equity markets continued to push higher in Q2, reaching new highs amid steady economic growth and inflation. Stock market gains were led by growth oriented technology shares, while global equities gained on continued growth overseas. The yield curve continued to “twist” with short term interest rates rising, reflecting the additional Fed tightening while longer term rates fell amid delays in implementing the new administrations policies.

Q1 2017 Market Summary

Click here for our detailed market overview for the first quarter.

The US Economy continues along a steady moderate growth path, with low volatility in financial markets. The first quarter of 2017 saw equity markets move higher in the wake of Presidential and Congressional elections, although gains moderated in March when actual policy debates took place. Risk was rewarded as growth oriented stocks, along with European and emerging markets were the better performers fore the quarter, while High Yield, Inflation-Protected, and Adjustable Rate bonds out-performed.