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Quarterly Commentary, Q2 2019

Benchmark Returns for the Period Ended June 2019

RCG "r" Logo (2018)
Annualized
Quarter 1 Year 5 Year 10 Year
US Treasury Bills (one month) 0.60% 2.23% 0.80% 0.43%
Barclays Capital US Gov’t/Credit Inter Bond 2.59% 6.93% 2.39% 3.24%
Standard & Poor’s 500 4.30% 10.42% 10.71% 14.70%
Russell 1000 Value (large cap value) 3.84% 8.46% 7.46% 13.19%
Russell 2000 (small cap) 2.10% -3.31% 7.06% 13.45%
MSCI Europe, Australia and Far East (EAFE) 3.68% 1.08% 2.25% 6.90%
MSCI Emerging Markets Index 0.61% 1.21% 2.49% 5.81%
Wilshire REIT 1.63% 10.53% 7.84% 15.66%

Quarterly Commentary

Global equity markets were positive for the second quarter. Domestic equities (as measured by the S&P 500) returned 4.30%, International equities (as measured by the MSCI EAFE Index) returned 3.68%, and Emerging Markets (as measured by the MSCI Emerging Markets Index) returned 0.61%.

The sharp drop during the fourth quarter of 2018 seems more like a distant memory than a recent market decline, as the S&P 500 reached another record high in June. The S&P is off to its best start for a calendar year in decades, yet the strong performance has as much to do with the sharp decline in the fourth quarter of 2018 as it has with positive performance in 2019. The average annual return for the S&P 500 since the 1920s is around 10.5%; its return over the past 12 months is 10.42%. While the returns of the US market over the past year have been close to average, the ride to get there has not, which illustrates the importance of sticking to an investment plan through downturns.

Remember that the S&P 500 is only a portion of a globally diversified investment portfolio. Although the S&P 500 is currently trading near a record high, other asset classes haven’t reached such lofty heights. Domestic Small Cap stocks (as measured by the Russell 2000) and International Large Cap stocks (as measured by the MSCI EAFE Index) are still well below the all-time highs they reached in 2018.

Interest rates were once again the topic of conversation during the second quarter. While the Federal Reserve held its interest rate target at 2.25%-2.50% throughout the quarter, economic growth expectations subsided and trade tensions remained. Because of this, the bond market began to price in interest rate decreases for the remainder of 2019 and beyond. Ten-year US Treasuries are currently yielding around 2% and earning less than shorter-term treasuries, resulting in an “inverted” yield curve.

An inverted yield curve has historically preceded recessions, which is creating anxiety for many. As for any possible recession, the devil is in the details. Both the cause and depth of the yield curve inversions are vital in determining their impact, and so far, the inversion is only slight: -0.14%. The time from an inversion to a recession has ranged from 6 to 24 months. To further complicate things for those attempting to time market performance, the equity market returns are never aligned perfectly with the peaks and valleys of economic growth.

For investors, this is simply a different horse on the same merry-go-round. Uncertainty is ever-present in economics and investing. One year it might be the housing market, the next the financial services industry, and currently, interest rates and trade tensions. As Niels Bohr, a Nobel Prize winning physicist stated bluntly, “Prediction is very difficult, especially about the future.”

PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.