Q2 2019 Market Commentary

The U.S. Stock market, during the second quarter of 2019, added to the gains of the first quarter. The story had a happy ending, however, the plot resembled Robert Louis Stevenson’s novel, Strange Case of Jekyll and Hyde. Let’s take a brief look at the performance of the S&P 500 Index (a widely referenced benchmark for measuring large U.S. Company Stock Market performance) for the three months comprising the second quarter of 20191 and how it relates to the story.

  • In April, Dr. Jekyll (the good guy) showed up. China’s economy reported data that was better than originally feared, with GDP growth better than anticipated, Chinese industrial production and retail sales for the month of March higher than anticipated, and Chinese unemployment holding steady at 5.2%2. Why does what happened in China matter to U.S. stocks? The U.S. Stock market is comprised of many multinational companies – China’s economy has one of the greatest impacts on many U.S. companies’ bottom lines. If China’s economy is stable, it is a bullish sign for U.S. earnings growth.
  • In May, Mr. Hyde (the bad guy) showed up. Simply put, trade talks with China were not going well, and the market made it known.
  • In June, Dr. Jekyll returned. Jerome Powell, Chairman of the Federal Reserve, gave an indication that interest rates could go down in upcoming months. This was a stark contrast to Powell’s recent actions of raising interest rates. In addition, trade discussions with China improved, which added to the rally.

While we have focused on the U.S. Stock market so far, we believe diversification is important to managing risk. The long-term benefits of diversification can provide a smoothing effect to portfolio performance over time as some pieces of the portfolio may behave like Jekyll, during a time others are behaving like Hyde. A perfect example of this occurred during the month of May when the Barclays U.S. Aggregate Bond Index rose 1.78%3 while the S&P 500 declined -6.58%.

There are many conveniently-worded adages that many investors quote, often to justify market timing. “Sell in May and go away,” is one of them. However, had we taken this course of action this past quarter, we would have been left sitting on the sidelines while the S&P 500 hit an all-time high in June. Our perspective on adages like these remains consistent:  they have much less to do with market fundamentals and are typically only referred to when the adage fits that particular period of time. Those who understand our investment philosophy know that we believe in the long-term incentives businesses and corporations have to succeed, thus, driving profit and growth over time, and, ultimately, leading to higher prices for investors.

For these reasons, we continue to apply our fundamental beliefs that risk and return are related, markets are efficient over time, profitability matters, and diversification is key. These fundamental beliefs continue to be the core of both our short-term and long-term investment approach.

As always, we look forward to our next conversation.

1 S&P 500 Index return source: Bloomberg
2 Chinese economic data summary source: The Earnings Scout
3 Barclays U.S. Aggregate Bond Index return source: Morningstar

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