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2Q 2019 Market Commentary from Cornerstone

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The second quarter of 2019 proved to be quite interesting for investors. The first quarter rally continued into April only to be followed by a scary drop in May precipitated by aggressive trade rhetoric and recessionary fears. U.S. Fed Chair Jerome Powell came quickly to the rescue by reassuring markets that the Fed would adjust policy as necessary to protect the U.S. economy from harm.

Chairman Powell’s hints of a rate cut also impacted the bond market. The significant drop in yields during the latter part of the quarter brought about a significant bond market rally. The drop in rates produced another yield curve inversion between the 3 Month T-bill and the Ten Year Treasury Bond. An inverted yield curve has preceded every post-WWII recession in the U.S.

International equity markets strengthened as well on comments from the EU Central Bank Chair Mario Drahgi indicating that the Bank would provide whatever support was necessary to ensure that the Eurozone economy continued to grow.

We find the current environment puzzling as the underlying support for both the U.S. and global economies appears to be weakening. The U.S. economy has been and continues to be quite strong, but there are chinks in the armor. Corporate profit margins seem to have rolled over, and corporate earnings continue to slow. While we agree that the market can and probably will rally upon any announcement of a significant trade deal with China, we believe that the effects of such a deal are not enough to justify continued significant equity appreciation.

We believe the Fed understands the ramification of a global slowdown, the cracks in the current U.S. expansion, and slowing corporate profits and is doing its best to engineer a soft landing and avoid recession. The question remains, will they be able to pull off this feat? Their track record is not particularly strong. So most of the time once the Fed begins lowering rates, we are already in a recession or it is too late to head one off.

 

About the Author

Bryan C. Taylor has over 20 years of experience in portfolio management and design. He is a Cornerstone Principal and currently serves as Chief Investment Officer and Chief Executive Officer at Cornerstone Management, where he oversees all operations and is Chairman of the Cornerstone Investment Committee.

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