The first half of 2019 saw robust gains across most asset classes, but it certainly wasn’t a smooth ride. Global stock markets got a jump start on the year thanks to progress in US-China trade negotiations and a newly “patient” Fed, but an abrupt breakdown in the trade talks (announced via Presidential tweet) spurred a sharp market sell-off in May. Stock markets subsequently shook off their swoon in June, rebounding on expectations of Fed rate cuts later in the year and (tentative) signs of re-engagement on the US-China trade front.  

The S&P 500 hit a new high near the end of June. Large-cap U.S. stocks shot up 7.0% for the month – their best June since 1955. U.S. stocks were up 4.3% for the second quarter, and a remarkable 18.5% for the first six months of the year—their best first half since 1997. This was a breath of fresh air to investors, after the severe downturns and “bear market” status the stock market experienced during the latter half of 2018. 

Foreign stocks also notched double-digit gains through the first half of the year. Developed international stocks gained 5.9% in June, 3.2% for the second quarter, and 14.2% for the year to date. European stocks have done a bit better, gaining 15.6% on the year so far. In April, the Brexit “can” was kicked down the road at least until October 31, but the risk of a disruptive “no-deal” exit remains. Emerging-market stocks also rebounded in June, gaining 5.4%. Although emerging-market stocks were only up 0.8% for the second quarter, their first-half gains stand at 12.6%.  

Moving on to the fixed-income markets, the 10-year Treasury yield continued to plunge from its multi-year high of 3.2% last October, dipping below 2% following the Federal Reserve’s June meeting. This was a near three-year low, and among its lowest levels ever. The 10-year yield ended the month at 2.0%. Because bond prices rise as yields fall, this drove the core bond index to a 3.0% gain for the quarter and an impressive 6.1% return so far this year. Floating-rate loans gained 1.7% for the quarter and are up 5.7% for the year. 

Alternative investment strategies in general delivered positive returns during the year’s first half, including trend-following managed futures, building on a positive first quarter. With that said, our allocations to direct real estate with Prana Investments were negatively impacted by an unexpected late-stage change in New York rent regulations passed in June. We are communicating in more detail about this issue with clients who own Prana funds that were affected.

Looking ahead, we still see a high degree of uncertainty and a wide range of plausible outcomes looking out over the next 12 months (and beyond). But at the margin we think the macro risks have increased. Trade uncertainty has damaged global business confidence in what by many measures is an already weak global economy. While this is for now being offset by easier monetary conditions, the inevitable impact of any additional central bank rate easing is certainly muted.  

We believe our portfolios are positioned to both generate attractive returns over the next five to 10 years and be resilient across the wide range of potential shorter-term risk scenarios. If central banks are successful with their renewed stimulus efforts, our analysis indicates that will favor our positions in global equities, flexible income funds, and floating-rate loan funds.   

On the other hand, should markets turn south, our portfolios will benefit from our “ballast” positions in core bonds, lower-risk hybrid and alternative strategies, and trend-following managed futures. These lower-risk, “insurance” positions have been a drag on our returns over the past several years as U.S. stocks have been in a record-long raging bull market. But we’ve seen their benefits during the occasional market corrections, including in last year’s fourth quarter. They also present us with potential capital to re-allocate back into U.S. stocks at lower prices and much higher expected returns if and when the opportunity should arise.   

Read the full investment commentary here.

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