Second Quarter 2019: The Roaring Nineteens
U.S. stocks are off to their best start to a year since 1997, as the S&P 500 rose 4.3% in the second quarter and 18.5% in the first half of 2019. The rally followed a disappointing fourth quarter of 2018, in which investors fretted about trade wars, slowing global growth, and the future path of Federal Reserve policy. Each of those themes had their part to play in the second quarter.
Better-than-expected employment and GDP numbers in April helped buoy equity markets before they swooned on escalated Chinese trade war fears and a surprising threat of additional tariffs on imported Mexican goods from President Trump. By late June, however, the S&P 500 had risen again, as trade war fears dissipated and Federal Reserve Chairman Powell weighed whether an interest-rate cut will be needed in the coming months.
The dovish shift in messaging from the Federal Reserve has done little to appease President Trump, who has repeatedly called for rate cuts over the past several months. Chairman Powell has reiterated the importance of central bank independence, but his hand may be forced, particularly if trade war uncertainty begins to drag down global growth. The bond market is certainly anticipating that the next interest rate move will be down, not up. The 10-year Treasury’s yield has hovered around 2.0%, below the current Federal Funds rate range, and futures markets are betting on the likelihood of three to four rate cuts over the next two years. Bond market returns were positive with the downward move in yields, and longer-dated assets outperformed.