During the second quarter of 2019 domestic equity markets built on the solid gains experienced in the first quarter. The S&P 500 Index overcame a sharp mid-quarter decline resulting from increased trade tensions, reaching a new record high and ending the quarter with its best start to a year in over two decades.
Large-cap stocks outperformed their small-cap counterparts during the quarter, with the Russell 1000 Index and Russell 2000 Index gaining 4.2% and 2.1%, respectively. Consistent with the dominant theme of the last decade, growth-oriented stocks once again outperformed their value-oriented counterparts across all market-caps. All S&P sectors, excluding Energy, posted positive returns during the second quarter, with Financials, Materials, and Technology the best performing sectors. The Healthcare sector lagged, gaining just 1.4%, due to increased political pressures. The Energy sector declined 2.8% during the quarter as energy prices collapsed, leaving the sector down 13.2% on a one-year basis.
Developed equity markets outside of the U.S. posted strong gains during the second quarter, further building on the sharp rebound in the previous quarter. European markets were among the best performers with the MSCI Europe Ex-U.K. Index returning 5.8% as the European Central Bank indicated that they would take accommodative action in response to slowing economic growth and increased trade tensions. The equity market in the U.K. lagged other developed markets, with the MSCI UK Index returning less than 1% as British Prime Minister Theresa May resigned, dramatically increasing the chance of a no-deal Brexit. Emerging equity markets provided a marginal gain after a volatile quarter dominated by the impact of continued U.S.-China trade tensions.
The Federal Open Market Committee (“FOMC”) held the target range for the federal funds rate at 2.25% to 2.50% during its June meeting but signaled possible rate cuts later this year due to increased uncertainty about the economic outlook and muted inflation. The yield on the benchmark 10-year Treasury Note peaked at 2.60% in April before beginning a sharp decline, falling 60 basis points and ending the quarter at 2.00%, its lowest level since President Donald Trump’s election in November 2016. The yield curve steepened slightly during the quarter as the yield on the 2-year Treasury, which is linked closely to monetary policy expectations, fell 52 basis points, leaving the spread between 2- and 10-year Treasuries at 25 basis points.
The initial estimate of second quarter gross domestic product (GDP) came in above market expectations of 1.8% at 2.1% growth. Personal consumption expenditures were the largest contributor to GDP, growing at 4.3% during the quarter due to a significant increase in consumption of goods coupled with an acceleration in consumption of services. An increase in government spending also helped to offset negative contributions from inventories, net trade, and fixed investment. Consumer and business confidence indices weakened as business activity appeared to slow. Global economic growth continued to slow as significant trade tensions plagued global financial markets.
The U.S. unemployment rate fell from 3.8% to a 49-year low of 3.6% in April, before ticking back up to 3.7% in June. The labor force participation rate remained relatively flat during the quarter and was unchanged on a one-year basis at 62.9%. The U.S. economy added an average of 170,000 jobs per month during the second quarter, despite weak numbers in May.
The year-over-year headline inflation rate fell from 1.9% to 1.6% during the quarter, with tumbling energy prices the main driver of the decline. During the same period, core inflation, which excludes food and energy, increased slightly from 2.0% to 2.1% with upward pressure coming from the indexes for shelter, used cars and trucks, and apparel.
