2nd Quarter 2019 Update

July 11, 2019

Key Points

• The global economic environment has continued to soften, as economists point to protectionist trade policies and uncertainties about the outcome and impact of Brexit.
• The yield curve is inverted (i.e., yields on three-month bills are higher than on 10-year notes), which usually presages a recession.
• Economists expect the FOMC to lower the fed funds rate as soon as July due to perceived slowing growth.

The Global Economy

The Bureau of Economic Analysis reported its third estimate of first quarter 2019 gross domestic product (GDP) of 3.1%, in line with the prior estimate, and higher than the fourth quarter of 2018’s 2.2% reading. The employment situation slowed substantially in the latest month, but continued to deliver gains, with an average of approximately 151,000 jobs added each month of the quarter. The unemployment rate held steady at 3.6%. The Federal Open Market Committee (FOMC) maintained its existing interest rate policy by keeping the federal funds rate target at a range of 2.25% to 2.50%. However, economists expect the FOMC to lower the fed funds rate as soon as July due to perceived slowing growth.

The global economic environment has continued to soften, as economists point to protectionist trade policies and uncertainties about the outcome and impact of Brexit. European economies have experienced a climate of slowing business investment, as firms delay investing in new projects until there is more clarity on the path of the region’s economy. China’s growth has also slowed, but the many policy initiatives it has taken over the past few quarters have enabled it to hold up relatively well. More action may be needed if the trade spat with the US continues much longer.

Below, we’ve highlighted broader market returns for the 2nd quarter and year-to-date time periods:

Source: Thomson Reuters

Fixed Income

Fixed income securities’ prices and yields continued to be impacted by concerns about slowing global economic growth during the quarter, as well as the potential effects of ongoing trade battles. The FOMC had earlier in the year suspended increases in the fed funds rates, but has now taken a more dovish stance, with analysts expecting a rate cut soon. Slowing growth has resulted in a continuation in the rally in bond prices, and a drop in yields. Economists expect this trend to continue, as seven FOMC committee members anticipate cutting the fed funds rate by 50 basis points this year. The fed funds rate is now expected to end 2020 at 2.1%, as opposed to an expectation of 2.6% three months ago.

Equities

Equity markets experienced a roller coaster ride during the quarter, with stocks posting strong gains in April before reversing course in May following the collapse of trade discussions with China, as well as the threats of tariffs on Mexico if the country did not assist with the migrant flow at the border. However, indexes rallied again in June as it became apparent that the FOMC was taking a more dovish approach to interest rates and would likely lower the fed funds rate in response to slowing growth. In addition, trade tensions seemed to ease with both China and Mexico, renewing investor confidence.

International stocks again generated positive results that in line with the gains in US equities. In the Eurozone, economic growth has struggled to gain momentum with the uncertainty surrounding Brexit and the resignation of UK Prime Minister Theresa May.

Summary

While the US expansion will become the longest on record in July, recession fears have recently begun to emerge. Economic growth has slowed this quarter from the rebound in the first quarter, in large part due to what economists view as the Trump administration’s capricious approach to trade. The threat of tariffs has dampened business investment and confidence. The bond market is also exhibiting concerns about a recession, as yields have dropped significantly in the past quarter due to a flight to quality and low inflation expectations. The yield curve is inverted (i.e., yields on three-month bills are higher than on 10-year notes), which usually presages a recession a year later.

However, recession worries are not currently being reflected in stock prices, with certain broad-based indexes recently establishing record highs. Stock prices historically have anticipated a recession about six months in advance. A steep decline in stock prices and significant drop in consumer spending will likely be the signs that the economy will be decelerating and enter a recession, but the consensus among economists is that such an occurrence likely won’t occur until later in 2020.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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