For the quarter, markets continued to rise, despite remaining uncertainty over trade; however, changing investor sentiment generated significant volatility.
The rally that began early in the year, continued through the quarter, but the upward trend was interrupted in May as concerns over a potential global slowdown, exasperated by an increase in tariffs, dominated sentiment. Markets were surprised by the about-face in US-China negotiations as China retreated from a number of commitments on the drafted trade deal. In response, central banks around the globe signaled their willingness to ease in the coming months. As a result, the downturn was reversed and equities continued to advance with the S&P 500 rising 4.3%. Through the first six months, the S&P 500 has risen a stellar 18.5%. Small cap stocks kept pace, but international and emerging markets stocks lagged due to a weaker economic backdrop. In addition, Brexit remains unresolved for the UK. The only meaningful change is that Theresa May will be stepping down as Prime Minister. Still, through the first half of 2019, international and emerging markets stocks have produced double digit returns.
Because of the Federal Reserve and the European Central Banks’s more dovish tone, fixed income investments also performed well. In June, Fed Chair Jerome Powell and ECB President Mario Draghi indicated their willingness to lower rates. Accordingly, investors priced in multiple rate cuts and interest rates declined. Overall, core bonds were up just over 3% and high yield bonds rose 2.4%. For the year, high yield bond returns are close to 10%, but this has been eclipsed by emerging market bonds, which, year-to-date, have provided double digit returns.
Although the rise in real return strategies lagged the rise in stocks, they continue to outperform historic averages year-to-date, with real estate up 19.3% and global infrastructure up 13.1%. Only commodities disappointed, with a decline of 1.2%, as metal prices declined due to expectations of softer demands and oil weakened by $1.75 per barrel. Year-to-date though, commodities are still up 5.1%.
Our absolute return, or risk management, strategies provided returns in line with those of bonds, with the exception of market neutral strategies. While market neutral strategies produced positive returns during the quarter, for the year returns are still below zero.
The quarter ended with a respite in the US-China trade war. At the close of the G20 summit, President Trump announced some concessions, allowing resumption of trade with Huawei on consumer products and China promised to buy more US agriculture. While the immediate threat of raising tariffs has subsided, the agreement does not address the larger issues separating the two sides. For risk to abate, improvement on intellectual property rights and market reforms has to be made.
Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.
Rick Cloutier, PhD, CFA is the Chief Investment Strategist for Washington Trust Bank with over 25 years of portfolio management and investment experience. He is responsible for directing the portfolio management, research, and trading activities for the bank’s multi-asset class strategies. He is also responsible for overseeing the client portfolio manager team and portfolio analytics team. Rick has written numerous articles for Investopedia and wrote a weekly column for the Fall River Herald News in Massachusetts. His research has appeared in numerous journals, including the Journal of Investment Management and Financial Innovations, the Journal of Business Management and Economics, and the International Journal of Revenue Management. He provided a nightly commentary on WALE radio and authored the novel Caveat Emptor. Rick earned his BS from URI, MBA from Boston University and PhD from SMC University.