Two Quarters Down, Two to Go in 201907-02-2019 |
Sources: Sources for data in tables: Equity Market and Fixed Income returns are from JP Morgan as of 06/28/19. Rates and Economic Calendar Data from Bloomberg as of 06/28/19. International developed markets measured by the MSCI EAFE Index, emerging markets measured by the MSCI EM Index. Sector performance is measured using GICS methodology.
As the second quarter of 2019 officially comes to a close, it feels like an appropriate time to reflect on what a wild ride it has been thus far. Global equity markets unanimously got off to a strong start in April, only to violently whipsaw into negative territory in May; naturally leaving investors to wonder if this was the beginning of the end for this long-running secular bull market. Fortunately, equity markets rebounded, and then some in June, making up nearly all of what was lost in May. In the U.S., the S&P 500 Index moved 7.05% higher in June, while the Russell Midcap Index gained 6.87% for the month. The Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 7.07% in June. On the international equities front, developed markets moved 5.93% higher, while emerging markets gained 6.24% for the month.
So, now that certain markets have recouped whatever value had been lost in May, and some even continue to make new all-time highs, what risks should investors pay special attention to during the second half of 2019? Furthermore, what complications could potentially bring an end to stock market appreciation, and once again push equity markets into a tailspin? Below are a few of the more noteworthy risks that we see for investors to keep in mind.
1. Will the newly agreed upon US-China truce lead to an ultimate agreement, or will it once again result in a stalemate? Another stalemate would almost surely push markets into a tailspin once more.
2. Will corporate earnings disappoint? The US-China trade truce should have enough of an amplifying effect on corporate earnings but expect markets to sell-off in the event that reported earnings are come in much weaker than expected.
3. Will the Federal Reserve cut interest rates as much as the market is currently pricing in? We would anticipate a sell-off in equities if interest rate cuts don’t live up to the market’s current expectation.
4. Will U.S. debt ceiling negotiations be quietly and adequately resolved? Any prolonged confrontation related to an increase in federal spending limits will almost certainly shake equity markets.
While we’re hopeful that the aforementioned risks will not take hold in a meaningful way to bring an ultimate end to stock market growth in the second half of 2019, there will undoubtedly be short-term bouts of increased volatility along the way. During such times, proper portfolio diversification can be critical. As a result, we encourage investors to revisit the diversification that may, or may not, be in place within their existing portfolios
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets.
There are special risks associated with an investment in real estate, including credit risk, interest rate fluctuations and the impact of varied economic conditions. Distributions from REIT investments are taxed at the owner’s tax bracket.
The prices of small company and mid cap stocks are generally more volatile than large company stocks. They often involve higher risks because smaller companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions.
Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity.
Products that invest in commodities may employ more complex strategies which may expose investors to additional risks.
Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond Prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the value of your investment.
MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.
MSCI-Emerging Markets: The Morgan Stanley Capital International Emerging Market Index, is a free float-adjusted market capitalization index that is designed to measure the performance of global emerging markets of about 25 emerging economies.
Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.
ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.
ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.
Investors cannot directly purchase any index.
LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.
The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.
The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.