Optimistic But Vigilant
As we look at the half way point of 2019, we can say that investors have been rewarded for their patience. Returns for almost every asset class are up and have rebounded substantially from the late 2018 sell off. Earnings from US companies continue to grow and generally beat their estimates. Companies look fairly valued in most cases, but not excessively valued. While we continue to favor Equities over Fixed Income, we continue to monitor a variety of risks.
The US market provided the strongest returns with the S&P 500 Index up 4.30% for the 2nd quarter and is up 18.54% for the year. That is a big rebound from the end of 2018. US Mid Caps as measured by the S&P Mid Cap 400 Index had returned 3.05% for the quarter and are up 17.97% YTD, with US Small Cap stocks up a modest 2.1% for the quarter and 16.98% for the year.
The strong returns in the US were coupled with strong performances across the globe, especially in the developed world. With the MSCI EAFE Index returning 3.68% for the quarter and 14.03% for the year. This is very encouraging given the overhang of Brexit in Europe and the strength of the US Dollar, which dampens some of those returns. The MSCI Emerging Markets struggled with .61% and 10.58% YTD. Trade tensions with China, which makes up nearly 40% of the index weighed heavily on those markets along with the strong dollar.
The bond market continued to surprise us in the 2nd quarter. The Barclays Aggregate Bond index was up 3.08% for the quarter and 6.11% for the YTD. The 10-Year US Treasury Bond has moved from 2.66% at the beginning of 2019 to 2.03% as of June 30th. That has given us an inverted yield curve currently and has prompted the Federal Reserve to seriously consider lowering the Fed Fund rate at their late July meeting. The European Central Bank is also considering lowering rates again, in a region where rates are already negative.
Most of our client accounts outperformed their benchmarks for the 2nd quarter of 2019, mainly due to our overweight to Equities, especially to US Equities. We continue to favor Equities over Fixed Income and US Equities to International Equities for the remainder of the year. We continue to have an underweight to Fixed Income, with a focus on keeping the average maturity of our Fixed Income portfolios shorter than that of the benchmark Barclays Aggregate Bond Index. We may revisit this position in the 3rd quarter, especially if both the Federal Reserve and the European Central Bank continue to lower rates.
Overall, we remain optimistic about the economy and the markets. But we remain vigilant in reviewing new information as it comes out.