June 30, 2019 Market ReviewSubmitted by Karstens Investments on August 6th, 2019
By Michael D. Karstens, CFP®, AIFA®
Stocks, bonds, and most financial assets continued to gain ground in the second quarter, and several U.S. indices finished at or very near all-time highs. The differentials in performance among U.S. assets were unusually narrow during the quarter, with both riskier and less risky assets posting modest, single-digit gains. In terms of U.S. stocks, large stocks gained 6.6% for the quarter, followed by mid cap stocks up 4.1%, and small stocks plus 2.1%. Year-to-date these assets are up a very strong 18.5%, 21.3%, and 17% respectively. U.S. bonds also did well as interest rates declined fairly rapidly. For the quarter, U.S. investment grade bonds were up 3.1% and are up 6.1% year-to-date. Much of this gain is due to the falling interest rates. International stocks once again lagged U.S. stocks, but were up 3.7% for the quarter, while emerging market stocks were basically flat. Fortunately, these two asset classes are up 14% and 11% year-to-date. Gold was one of the leading performers for the quarter and was up 9%, which was about equal to its gain for the year. Before we break out the champagne, we should note that the gains year-to-date followed a very sharp decline in global markets during the fourth quarter of 2018. As you may recall, markets became very concerned when interest rates surpassed the 3% level, trade tensions grew, and global growth started to wane. If you look at the results on page four, you will notice much more modest rates of return for the 12-month period. As we look ahead, it certainly feels like something has got to give. Global trade fears continue, corporate profit growth seems to be slowing, global economic concerns are definitely rising, yet stock prices continue to climb. Falling interest rates would tend to support the case that the economy is slowing, and the Fed’s willingness to cut rates with the stock market at an all-time high makes me wonder if their numbers don’t indicate some type of recession on the horizon. You would think that if the economy does indeed continue to weaken or fall into recession, the stock market may see declines. If the economy is stronger than some believe, stocks could do well, but we may need to question the low interest rates.
We probably sound a bit like a broken record, but these are certainly unprecedented times. It’s hard to wrap your head around the fact that there are over $13 trillion in bonds around the world that actually have negative interest rates! It’s also hard to fathom that basket cases such as Greece and Italy can borrow money at rates less than the United States government. I recently came across a piece that I thought detailed the current situation rather succinctly and was written by Mark Grant, Chief Global Strategist for Fixed Income at B. Riley FBR. Grant stated that they print money to lower borrowing costs to help fund budgets and social programs without the unpleasantness of taxes. Central bankers are the only people on Earth who won’t go to jail for creating money. Bond yields will stay low, owing to this “governmental intervention on a scale never before seen in history,” Grant asserts. It’s a sad state of affairs, but all you can do is play along and try to front-run what the central banks will do next. The game is rigged, and has been since the financial crisis. Borrowers whose debts cost nothing, or less, may benefit, but savers, especially pension funds and endowments, suffer, he continues. They find it impossible to meet future obligations with negative yielding bonds, especially when they assumed their assets would deliver annual returns of 7.5%. That will force their free money into risky assets, notably real estate and equities, Grant concludes. Well said.