Year-to-date performance is impressive, led by U.S. stocks returning 18.7%.  Foreign developed and emerging market stock returns also posted double-digit returns. Bonds are having their best year since 2011, benefitting from reduced inflation expectations and lower interest rates. Like last quarter, the primary driver of stock and bond returns is Federal Reserve policy. The Federal Reserve has shifted from a rate increase posture to a ‘wait and see’ approach which investors are interpreting as a signal that the Fed will cut rates as soon as this summer.


Somewhat lost in the focus on Fed policy is the fact that the U.S. economy has grown 121 consecutive months. This is the longest economic expansion in American history. Unsurprisingly, positive economic growth is conducive to strong profit growth and stock returns. While we welcome this year’s strong returns for both stocks and bonds, bond yields, such as the ten-year U.S. Treasury bond, are signaling slower economic growth ahead. With many economic indicators weakening, including home sales, manufacturing orders and business confidence, is the global economy experiencing a temporary soft patch or slowing into a recession?


While the risks of a recession are clearly higher now, it is worth remembering that bull markets don’t die of old age. Aggressive interest rate increases, excessive speculation or unmanaged systematic risks are the usual culprits. With the Fed signaling a policy shift to lower interest rates and few signs of excessive speculation, we hope the political reality that a strong economy is a must in a presidential re-election year prevents tariff and trade issues from nudging the economy into recession.



The fading tax cut tailwind, slowing economic growth and peak margins are pressuring earnings growth in 2019. The Fed has saved the day for now, but earnings growth must accelerate to support stock market values. As such, we expect volatility to remain high as investors search for signs that 2020 will bring better economic growth and stronger corporate earnings.