The US stock market continued its winning streak in the second quarter this year, after seeing about a 5% pullback at the start of the quarter. US stocks continue to perform very well and emerging market stocks saw a nice rebound during the second quarter after several years of underperformance. Bonds ended the quarter relatively flat, and the Barclays Aggregate Bond Index remains slightly negative in the first half of the year.
The most recent reports on inflation for June came in slightly better than expected which has helped to calm market nerves. Markets were beginning to become uneasy with the previous inflation reports running a little hotter than expected. The Federal Reserve appears to be on track to start cutting the Federal Funds Rate in September assuming inflation reports do not surprise to the upside. However, instead of the projected three interest rate cuts this year, it appears they will only cut once or twice depending on inflation data going forward.
Economic growth in the US continues to be positive, however it does appear to be slowing down after better-than-expected data over the last year. It is too early to cause concern, but we will be monitoring this data closely to determine if it is just an adjustment expected slow growth going forward or if it begins to slow more meaningfully.
International economies are improving their growth projections with Europe narrowly avoiding recessionary levels. Japan’s growth prospects continue to improve, and China has also seen increased growth in manufacturing and exports. China’s consumer spending is still weak with low consumer confidence and their property markets continue to be strained.
Unemployment has ticked up slightly but continues to remain at historically low levels. Labor markets appear to be cooling off. There are less available jobs open per worker which is showing a gradual easing to more normal employment conditions. This should continue to help wage growth slow going forward, in turn, helping to ease inflation.
As a reminder from our last article, markets have risen during election years 83% of the time going back to 1928, with positive returns in twenty out of the last twenty-four election years. During the four negative return years during an election year, economic growth and higher unemployment were the biggest culprits for negative market sentiment.The positive trend is holding up so far this year, but we do expect more volatility as elections near. This is normally short-term volatility with things getting back to more normal level after elections. We do not recommend making any investment decisions based on anticipated election outcomes.
We continue to be mindful of all the risks the market faces for the remainder of the year, from a Fed policy mistake, inflation remaining elevated, company earnings coming under pressure, and continued geopolitical risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market show positive returns at higher percentage rates the longer the time-period measured.
Please communicate with us if any short-term cash needs arise so we can look for opportunities to be pro-active when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market. We appreciate the trust you have placed in us and will continue to make prudent investment decisions as we navigate the markets going forward.