2Q’19 : Best First Half for US Stocks in Over Twenty Years…New Highs Ahead?

The stock market continued to make new highs in the second quarter, with the first half of 2019 turning in the best performance since 1997. The S&P 500 was up 17% and Nasdaq was +20%, despite a sudden downdraft in May caused by worries of an escalating trade war with China and evidence of a
global economic slowdown.

The market reversed itself when Fed Chairman Powell signalled the Fed would support the economy with interest rate cuts if necessary, and when other key central banks announced plans to take supportive active as well. By the time Powell cut rates ¼ percentage point on July 31 – the first interest rate cut since December 2008, when the global financial system was in true crisis – the market had largely discounted the news, overlooking weak 2Q earnings to bound forward to new highs.

Despite record low unemployment, benign inflation numbers, and strong consumer spending, the Fed cited concerns over ongoing trade uncertainty, slowing global economic growth and its possible spillover in deciding to cut rates. As long as trade tariff uncertainties continue, industrial production and capital investment will likely remain anemic; business confidence has weakened due to concerns about disruption of the complex, $7T global supply chain caused by trade tariffs, both real and threatened.

Consumer strength though is real and so far, durable; with 70% of US GDP service-driven, that has more than offset the weakness cited above in the industrial space.To us, that mean that US stocks are still the place to be, though new highs are unlikely now given continuing worries over trade tariffs, geopolitical risks and possible slowing US and global growth; but companies with strong secular tailwinds and competitive advantage, good managements and solid balance sheets, should continue to deliver strong earnings and stock price appreciation. The Fed has stated plainly they are prepared to support the US economy with further interest rate cuts, and central banks around the world are doing the same, and that, historically, has usually provided an
underpinning for stock prices.

As always, we welcome your comments and questions, and are happy to address any and all concerns, at any time.  As I appear on CNBC regularly commenting on stocks and the markets, you can also check my LinkedIn profile for updates on my thinking in between quarterly newsletters (or just call or write!). Attached is my previous quarterly newsletter in case you missed it in April.

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