Global Markets – 2Q19 Review

Global equities continued their upward trajectory, posting modest gains in the second quarter.  The back-to-back quarterly advances results in a mid-teen return for most averages as we reach the mid-point of 2019.  Company-specific fundamentals took somewhat of a backseat to macro considerations in the quarter, as investors keyed in on heightened trade tensions and changes in central bank monetary policy.  While the aggregate performance for stocks give the appearance of a relative placid market environment, the underlying pin action in stocks during the quarter told a more volatile story.

As we reach the halfway mark of the year, there are a number of notable divergences in play that are worth contemplating.  U.S. stocks (as measured by the S&P 500 Index) are approaching prior high-water marks, yet segments of the yield curve are inverted – often a precursor to a recession.  Consumer spending remains high, yet corporate capex and business confidence readings offer a more sober outlook.  On an investment style basis, growth stocks are leading the way, while more economically-sensitive value stocks continue to lag.  The year-to-date rally has helped to erase the losses that were sustained in 2018, and Cambiar is cautiously optimistic that equities continue to offer an attractive risk/reward profile relative to other asset classes.  That said, this constructive view is largely dependent on the expectation for the U.S. and China to reach a compromise in their ongoing trade talks.

There was a classic ‘bad news is good news’ response by investors in the quarter.  Stocks sold off in May on concerns about the negative impact of trade on corporate earnings, only to rally in June after global central banks made it clear they were willing to respond with additional easing measures to sustain the economic recovery.  After implementing four rate hikes in 2018, the U.S. Federal Reserve has since shifted to a more dovish posture – indicating the potential for rate reduction(s) in the coming months.  Central banks in Europe, Australia, Japan, the United Kingdom, and India indicated a similar willingness to make accommodative moves in an attempt to maintain/stimulate growth in their respective economies.  Given that central banks remain at or near ultra-accommodative levels almost 10+ years into the current recovery, the obvious question is what measures policymakers will have at their disposal when the next down cycle is upon us?




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