Whilst the second quarter of the year proved more volatile, markets delivered a positive return. After the setback in May markets enjoyed a strong rebound in June, driven both by hopes of a positive outcome for trade relations at the meeting between Donald Trump and Xi Jinping, and by a re-affirmation of the pivot in monetary policy, mainly by the US Federal Reserve, but also to some degree the ECB. As a result, the US market has achieved its best first half year return in more than two decades. The 6.9% rise for the market in June was the best for that month since 1955, leaving the S&P up 17.3% since the start of the year. This is the benchmark’s strongest first half year performance since 1997.
During the second quarter further evidence emerged of a slowdown in the global economy with even the most recent data in the States demonstrating a pullback in the economic growth rate. This demonstrates the importance of central bank policy and global monetary conditions on the market cycle. Market optimism that the Fed and other central banks are willing to ease monetary policy aggressively has under pinned equity markets, despite the fact that the second quarter has seen a continuation of negative demand shocks in both advanced and emerging economies.
Although equity markets have been universally positive there has been more volatility during the quarter, especially in May when investors were spooked by the escalation of trade disputes between the US and China. Inflation has helped, having remained surprisingly quiescent, allowing the Fed to pivot toward a more dovish stance. Given the late stage of the US cycle, this has been a surprise, and suggests that structural factors may be weighing on prices and preventing the normal cyclical pickup. One such factor would be the intense competition in the retail sector as a result of the rise of internet shopping. More generally, geo-political risk, as measured by the GPR index (geopolitical risk index), remains elevated – analysis shows that high levels of the index are associated with weaker economic activity and in the current environment this will weigh on capex.
The US Federal Reserve appears to be acting pre-emptively, motivated to extend the current economic cycle as soft global growth and persistently low inflation risks depress expectations further. The European Central Bank (ECB) is discussing further easing options while the Fed’s dovish rotation has permitted a number of emerging market central banks to pursue more accommodative policy. The global economy continues to face a number of challenges, and while services and consumer sensitive sectors have been broadly resilient to the downturn in manufacturing, global trade growth remains depressed, hindering the ability of open economies to accelerate markedly. China is increasingly important in global terms and it can be argued that their transition to a more domestically led economy is one of the reasons for the fall off in global GDP growth. This affects both consods and commodities and has affected economies in a wide number of regions.