Markets & Economy

Quarterly Market Review

Second Quarter 2019
T. Rowe Price

Stocks overcame a sharp pullback in May and recorded solid gains in the second quarter. The large‑cap S&P 500 Index reached record highs and ended with its best start to the year in over two decades. Except for energy stocks, all sectors in the S&P 500 recorded gains, led by financials shares, which gained 8% on a total return (including dividends) basis. Materials stocks also performed well, while a rise in Microsoft shares helped drive strong gains in information technology stocks and propelled the company past USD 1 trillion in market capitalization—a threshold previously matched only briefly by Apple and Amazon.com. The quarter was also notable for Uber’s initial public offering, one of the 10 largest in history and the biggest since Chinese internet giant Alibaba Group’s debut in 2014. 

U.S. Stocks
 

2Q 2019

 

Year-to-Date

 

Dow Jones Industrial Average

3.21%

 

15.40%

 

S&P 500 Index

4.30

 

18.54

 

Nasdaq Composite Index

3.58

 

20.66

 

S&P MidCap 400 Index

3.05

 

17.97

 

Russell 2000 Index

2.10

 

16.98

Past performance is not a reliable indicator of future performance.
Note: Returns are for the periods ended June 30, 2019. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only.
Sources: Standard & Poor’s, LSE Group. See Additional Disclosures.

Waxing And Waning Trade Hopes Drive Sentiment

The rise, fall, and resurgence of hopes for a resolution to the trade dispute between the U.S. and China seemed to play a large role in driving sentiment during the quarter. In early April, President Donald Trump announced that the U.S. and China were nearing an “epic” trade deal. High‑level talks continued over the next few weeks, and President Trump stated near the end of the month that Chinese President Xi Jinping would soon visit Washington, presumably to sign an agreement.

Hopes for a deal were dashed in early May, however, sending stocks sharply lower. With negotiations at a standstill, on Friday, May 10, the White House increased the tariff rate from 10% to 25% on USD 200 billion in Chinese goods. (The U.S. had previously imposed tariffs at the higher rate on USD 50 billion in Chinese products deemed strategically important.) The S&P 500 experienced its second‑worst day of the year the following Monday, after China’s announcement over the weekend that it was imposing retaliatory tariffs on an additional USD 60 billion in U.S. imports. Companies with significant exposure to China were hit particularly hard, with Apple falling nearly 6% as investors worried both about iPhone sales in China and rising costs for components made in the country.

Further Tariff Hikes Averted, At Least For Now

U.S. trade policy took an unexpected turn on May 30, when the president announced in a tweet that the U.S. would impose a 5% tariff on Mexican goods unless the Mexican government stopped the flow of unauthorized migrants across the border. A later presidential statement added that the tariff would gradually increase to 25% “if the crisis persists.” Stock futures fell sharply in response, with automakers among the worst hit given the importance of cross‑border supply chains in the industry.

Trade tensions eased again in June, supporting sentiment. President Trump announced early in the month that the Mexican tariffs would be suspended following new security pledges from the Mexican government. The president also seemed to give a boost to markets on June 18, when he promised “an extended meeting” with Chinese President Xi Jinping at the G‑20 summit at the end of the month. Investors further welcomed Treasury Secretary Steven Mnuchin’s remark that negotiators were “90% of the way there” in reaching a deal. Markets were closed on the final weekend of the quarter, when President Trump announced that the two sides had resumed negotiations and arranged a truce that would prevent the imposition of new tariffs.

Worsening Economic Signals Raise Hopes For Dovish Fed Turn

While trade signals fluctuated, economic data generally worsened throughout the quarter. In early April, markets surged following reassuring reports on manufacturing activity in both the U.S. and China. Investors also reacted positively to strong jobs and retail sales data. Durable goods orders fell back sharply in the first two months of the quarter, however, and IHS Markit’s composite survey of both U.S. manufacturing and service sector activity in June indicated the weakest growth in overall business activity in three years. May payroll increases fell far short of expectations, and consumers appeared to be growing less optimistic despite healthy wage gains—the Conference Board’s survey of June consumer confidence hit its lowest level in two years due to “a less favorable assessment of business and labor market conditions.”

Expectations that the Fed would respond to the slowdown by cutting interest rates seemed to be the primary factor in June’s market rebound. The S&P 500 Index recorded its second‑best day of the year on June 4, following a pledge from Fed Chair Jerome Powell that policymakers were paying close attention to the impact of trade tensions on the economy and would “act as appropriate to sustain the expansion.” Investors were further encouraged by the Fed’s statement following its June 18–19 policy meeting. Policymakers removed previous references to being “patient” in making policy adjustments, raising hopes that they would act aggressively to counter any downturn.

Trade Progress Is Key For Markets In The Second Half Of The Year

Positive economic growth, low inflation, and accommodative monetary policies are likely to support financial asset prices in the second half of 2019, although much depends on a resolution of the U.S‑China trade dispute. While the consensus earnings forecast is for a reacceleration in corporate earnings growth later in the year, this will depend on improving economic conditions, particularly outside the U.S. However, the global economic outlook remains subdued as most developed economies are growing below their potential and trade tensions are corroding business confidence and capital spending.

Additional Disclosures
London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2019. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

S&P Indices are products of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”), and have been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by T. Rowe Price. T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Indices.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Overview

Developed non‑U.S. equity markets posted solid second‑quarter gains as the Federal Reserve (Fed) and European Central Bank (ECB) signaled they would take measures to combat slowing economic growth and address the risks associated with ongoing trade tensions between the U.S. and China.

Within the MSCI EAFE Index, which tracks developed markets in Europe, Australasia, and the Far East, every sector except real estate advanced, led by gains in information technology, consumer discretionary, and industrials. Growth stocks in the EAFE index rose 5.96%, outperforming value shares, which returned 1.89%.

International Indexes
     Total Returns

MSCI Index

    

2Q 2019

Year-to-Date

EAFE (Europe, Australasia, Far East)

 

3.97%

14.49%

All Country World ex-U.S.A.

 

3.22 13.99

Europe

 

4.91

16.45

Japan

 

1.05

7.97

All Country Asia ex-Japan

 

-0.56

10.83

EM (Emerging Markets)

 

0.74

10.76

Past performance is not a reliable indicator of future performance.
All data are in U.S. dollars and represent gross returns, as of June 30, 2019.
This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Investors cannot invest in an index.
Source: MSCI. See Additional Disclosures.

Regional Recap

EUROPEAN STOCKS RISE ON HOPES OF EASIER MONETARY POLICY

The MSCI Europe Index rose almost 5%, buoyed in part by assurances by ECB President Mario Draghi that the bank could offer more stimulus measures as early as July if growth continued to stall. His comments and similar promises by the Fed drew risk‑tolerant investors back to markets. German and French markets gained approximately 7%, as measured by their respective MSCI indexes. UK stocks, pressured by ongoing Brexit uncertainty, rose less than 1%.

European Growth Subdued And Under Pressure Of Trade Woes

Myriad uncertainties contributed to volatility throughout the quarter. Trade tensions and a slowing global economy have taken a toll on European growth and sentiment. Germany’s Bundesbank cut its latest 2019 economic growth forecast to 0.6% from 1.6% in December and warned that “lackluster exports” have hurt Germany’s export‑heavy economy. The most recent data showed German imports, exports, and industrial production fell much more than expected—imports sank 1.3%, exports slumped 3.7%, and industrial production declined 1.9%. Throughout Europe, growth has been driven by the services sector, which reflects the relative strength of consumer demand and improving labor markets. However, business optimism about the future has fallen and is at its lowest level since 2014.

UK’s Boris Johnson Expected To Be Next PM

Unable to secure a Brexit deal, British Prime Minister Theresa May resigned June 7, leaving her yet‑to‑be‑determined successor to get parliamentary approval for a Brexit plan. After several rounds of voting, former Foreign Secretary Boris Johnson seems to be the favorite and is expected to win versus current Foreign Secretary Jeremy Hunt in a partywide vote at the end of July. Johnson has pledged to uphold the October 31 deadline that the European Union in April gave the UK to finalize a Brexit agreement. Johnson’s victory would increase the chance of a no‑deal Brexit and increase pressure on the British pound, the UK economy, and businesses in the short term as investors brace for a hard Brexit, said T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons. While the Bank of England held rates steady at its June meeting, Governor Mark Carney indicated that the bank would provide stimulus to offset economic weakness in the event of a no‑deal Brexit. Carney has said he believes a no‑deal Brexit would be a significant shock to demand and would not resolve the uncertainty that is hanging over business decisions and investment.

Japanese Equity Gains Capped By Trade Tensions

Japanese stocks rose but underperformed other developed markets as the U.S.‑China trade war hit the trade‑dependent economy. In its latest report, the Ministry of Finance reported that Japanese exports fell for a sixth consecutive month in May, suffering from a sharp decline in chipmaking equipment, which fell by almost 28%. Business confidence among manufacturers dropped to a two-and-a-half-year low in June, which, combined with weak exports and household demand, is sparking concerns that the economy will fall into recession. At its most recent meeting, the Bank of Japan left interest rates unchanged but joined the Fed and ECB in signaling its readiness to increase stimulus if needed. 

Emerging Markets Rally Amid Risk‑On Revival

Emerging markets stocks rose in the second quarter as investors returned to riskier assets as trade tensions between the U.S. and China eased and global central banks promised monetary stimulus. Emerging Europe and Eastern Europe markets both gained more than 12%, boosted by a 17% gain in Russian shares. Latin American stocks rose nearly 5%, thanks in no small part to a 32% rally in Argentine stocks. In May, MSCI announced that it would include Argentina in its emerging markets index, which has the potential to draw billions of dollars into the market.

The MSCI EM Europe, Middle East and Africa Index rose 8.11%, also propelled higher by Russia’s gains. Turkish stocks rose 3%, buoyed late in the period by the defeat of Turkish President Recep Tayyip Erdogan’s candidate in Istanbul’s mayoral repeat election. The defeat ended the 25‑year dominance of Erdogan and his party in the city. T. Rowe Price Sovereign Analyst Peter Botoucharov said the opposition party’s victory is a long‑term positive. It is the first sign of potential political rebalancing after years of single‑party rule. However, the transition could cause volatility.

Outlook: Global Growth Expected To Moderate But Bottom May Be In Sight

We expect global growth to moderate against the backdrop of ongoing trade tensions, slowing Chinese demand, and geopolitical disrupters, including policy uncertainty in Italy, as well as uncertain Brexit negotiations. Trade-driven economies, including Germany, may be the hardest hit going forward. U.S.-China trade tensions at the beginning of the year have likely exacerbated this slowdown, but the improved sentiment at the Group of 20 meeting will likely support a rebound in confidence. Even so, the trade tensions have had an impact on global growth, which will likely prompt the ECB and the Fed to ease policy within the next quarter or two. Chinese monetary and fiscal stimulus have the greatest potential to drive global growth higher. Lower oil prices should give growth a boost among oil importers, including Europe, China, and India. While some of the political risks that had hung over emerging markets countries, have eased, myriad geopolitical and trade issues remain that could spark risk-related selling and derail markets. Other challenges to the outlook for global equities include the rising popularity of anti-establishment and populist political parties.

Additional Disclosures
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Treasury yields fell during the quarter as slowing economic growth and tariff concerns led to increasingly dovish signals from the Federal Reserve and other developed market central banks. The benchmark 10‑year Treasury note’s yield dropped from 2.41% to 2.00%, its lowest level since President Donald Trump’s election in November 2016, and other maturities also saw significant yield declines. The 10‑year Treasury yield has fallen from a 12‑month high of 3.24% on November 8, 2018. (Bond yields and prices move in opposite directions.)

Total Returns    

Index

2Q 2019

YTD

Bloomberg Barclays U.S. Aggregate Bond Index

 3.08%

 6.11%

J.P. Morgan Global High Yield Index

 2.82

 10.08

Bloomberg Barclays Municipal Bond Index

 2.14

 5.09

Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index

 3.42

 4.99

J.P. Morgan Emerging Markets Bond Index Global Diversified

 4.08

 11.31

Bloomberg Barclays U.S. Mortgage Backed Securities Index

 1.96

 4.17

Past performance is not a reliable indicator of future performance.
Figures as of June 30, 2019. This table is shown for illustrative purposes only and does not represent the performance of any specific security.
Sources: RIMES, as of June 30, 2019; Bloomberg Index Services Limited, and J.P. Morgan. See Additional Disclosures.

Indications Of Looming Rate Cut Help Push Treasury Yields Lower

The Fed left its short‑term lending rate unchanged at its two meetings during the period, but at its June meeting, the central bank signaled that a cut may be looming, noting increased uncertainties around the economic outlook. The central bank’s policymakers, who had previously said they would be “patient” in their approach to interest rate adjustments, instead said that they “will act as appropriate to sustain the expansion,” implying a willingness to cut rates if needed. The two‑year Treasury yield, which is closely tied to monetary policy expectations, tumbled 52 basis points during the quarter, the most since the fourth quarter of 2008, according to MarketWatch.

The Fed’s announcement came soon after European Central Bank President Mario Draghi indicated that the bank could offer more stimulus measures as early as July if growth continued to stall. Although the U.S. unemployment rate was at a 50‑year low, signs of slowing economic growth and concerns about the impact of the U.S.‑China trade dispute also contributed to the price gains in safe‑haven government bonds during the quarter. According to the CME FedWatch Tool, at the end of June the fed funds futures market was pricing in a 100% chance of at least a quarter‑point rate cut by December with many investors betting that a 0.75 percentage point rate cut is possible by Christmas.

Portion Of Yield Curve Inverts

The three‑month/10‑year portion of the Treasury yield curve was inverted during much of the period—meaning that the shorter‑maturity security offered a higher yield than the longer one. An inversion of this part of the curve has often foreshadowed recessions in the past, although there have also been false positives and the start of a downturn can lag an inversion by a significant amount of time. The two‑year/10‑year segment of the curve, which is also closely watched as an indicator of the health of the economy, did not invert.

Treasury Yields

Maturity

March 31

June 30

3-Month

2.40%

2.12%

6-Month

2.44

2.09

2-Year

2.27

1.75

5-Year

2.23

1.76

10-Year

2.41

2.00

30-Year

2.81

2.52

Source: Federal Reserve Board.

Corporate Bonds Top Performer In Investment‑Grade Benchmark

Corporate bonds gained more than 4% during the period and were the strongest segment in the Bloomberg Barclays U.S. Aggregate Bond Index, which measures the performance of taxable U.S. investment‑grade bonds. Investment‑grade corporates benefited from declining interest rates and the positive momentum in the stock market. Technical factors were also supportive as issuance for the first half of 2019 dropped from the same period last year, and cash flows to the segment were positive. Mortgage‑backed securities produced solid results but underperformed Treasuries as falling rates increased the likelihood of mortgage prepayments and refinancings.

Treasury inflation protected securities also underperformed nominal Treasuries as break‑even rates—a market‑based measure of inflation expectations—fell during the period. The Fed’s preferred inflation measure, the core personal consumption expenditures (PCE) price index, which excludes food and energy, increased just 1.6% through the 12‑month period ended in May and remained below the central bank’s 2% annual target.

Stock Market Rally, Solid Fundamentals Help High Yield Bonds Record Solid First Half

The high yield bond sector cooled off somewhat after the first quarter, but solid results in the second quarter left the below investment‑grade segment up more than 10% through the first half of the year. Strong demand and the stock market rally aided results, and bankruptcies in the segment remained below historical averages. Floating rate loans were also positive but underperformed bonds.

Munis Benefit From Favorable Supply/Demand Factors

Strong demand helped support municipal bonds. Cash flowed into the asset class at a record pace during the first six months of 2019, while the overall supply of bonds in the market has shrunk as bonds matured or were called at a faster rate than they were being issued. Fundamentals were also positive as higher‑than‑expected tax revenue eased fiscal concerns in some states. Lower‑rated segments of the muni market, including Puerto Rico debt, outperformed for the quarter.

Developed Market Bond Yields Reach Record Lows

Similar to Treasuries, concerns about tariffs and slowing economic growth drove developed market sovereign bond prices higher. Yields were at record lows in many developed markets at the end of June, and benchmark 10‑year government bonds in Switzerland, Germany, Denmark, and Japan had yields below zero. The major central banks left rates unchanged during the period, and late in the quarter the European Central Bank said that its very low rates were expected to remain on hold through the first half of 2020. Meanwhile, Bank of Japan Governor Haruhiko Kuroda said that, although the bar for further easing is high, the bank has options to increase monetary stimulus, if necessary, such as by cutting the ‑0.1% benchmark rate deeper into negative territory.

As Investors Search For Yield, Emerging Markets Deliver Robust Results

Emerging markets bonds were the strongest performers in the fixed income universe. Investors were attracted to the relatively higher yields offered by emerging markets debt, and local‑currency bonds were supported by the strengthening of many currencies versus the U.S. dollar. Market‑friendly candidates fared well in elections in South Africa and India. However, some major emerging markets issuers faced challenging headlines. One notable example was Mexico’s sovereign debt, which was downgraded to BBB by Fitch, with the ratings agency citing increasing risks from state‑owned oil company Pemex’s deteriorating credit profile and external threats from trade tensions. 

Outlook: Environment Appears Supportive For Fixed Income In Second Half Of 2019

In their midyear market outlook, T. Rowe Price’s chief investment officers (CIOs) noted that market expectations for monetary policy shifted dramatically in the first half of 2019. An inversion in the U.S. Treasury yield curve signals growing market confidence that the Fed’s next rate move will be downward, says Mark Vaselkiv, CIO, Fixed Income. Vaselkiv believes that slow but positive economic growth, limited inflation pressures, and friendly central banks could create a supportive environment for bond investors in the second half of the year. However, trade tensions and U.S. dollar strength suggest that investors should take a relatively cautious approach to emerging markets debt. 

Additional Disclosures
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

GLOBAL CAPITAL MARKETS ENVIRONMENT

Stocks in the U.S. rose in the second quarter, despite a sharp pullback in May stemming from increased trade tensions between the U.S. and some of its key trading partners. Equities advanced as longer‑term interest rates declined and expectations grew that the Federal Reserve would reduce short‑term rates in response to slowing economic growth. Toward the end of the quarter, U.S. stocks were lifted by European Central Bank (ECB) President Mario Draghi’s willingness to implement more stimulus measures if weakening eurozone growth weighs on already‑low regional inflation. Equities were also buoyed by hopes that the U.S. and China would draw closer to reaching a trade deal at the G‑20 summit at the end of June. While a trade deal was not reached at the summit, both parties agreed to resume negotiations and not implement new tariffs.

Large‑cap shares outperformed mid‑ and small‑caps. The S&P 500 Index returned 4.30% versus 3.05% for the S&P MidCap 400 Index and 2.10% for the small‑cap Russell 2000 Index. As measured by various Russell indexes, growth stocks surpassed value across all market capitalizations.

In the large‑cap universe, as measured by the S&P 500, most sectors advanced. Financials shares performed best, even though falling long‑term Treasury yields weighed on banks’ lending margins, as several large banks reported stronger‑than‑expected first‑quarter corporate earnings. Materials and information technology stocks also posted strong returns and outperformed the broad index. Higher‑yielding stocks in the real estate and utilities sectors―which often behave like bonds in response to interest rate movements―rose but lagged the S&P 500, even though 10‑year Treasury yields plummeted to lows not seen since 2016. The energy sector was the only segment with negative returns, as oil prices slipped during the quarter amid concerns about slowing U.S. and global economic growth. Tensions in the Middle East did cause a late‑June spike in oil prices, as two oil tankers were attacked in the Gulf of Oman and Iran shot down a U.S. drone. 

U.S. Stock Returns
  S&P 500 Index S&P MidCap 400 Index Russell 2000 Index
2Q 2019 4.30% 3.05% 2.10%
Year-to-Date 18.54 17.97 16.98

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of June 30, 2019; Standard & Poor’s, LSE Group. See Additional Disclosures.

Domestic bonds produced strong second‑quarter returns: The Bloomberg Barclays U.S. Aggregate Bond Index returned 3.08%. The Federal Reserve kept short‑term interest rates unchanged at the April 30–May 1 and June 18–19 policy meetings, as expected. Perhaps the most notable news from the Fed’s June meeting was that policymakers indicated that they “will act as appropriate to sustain the expansion”—echoing an early‑June comment from Fed Chairman Jerome Powell—implying a willingness to cut rates if needed. The Fed’s dovish tone throughout the quarter contributed to a rally in Treasury securities. 

U.S. Bond Returns
  Bloomberg Barclays U.S. Aggregate Bond Index Bloomberg Barclays Municipal Bond Index JPMorgan Global High Yield Index
2Q 2019  3.08% 2.14% 2.82%
Year-to-Date 6.11 5.09 10.08

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of June 30, 2019; Bloomberg Index Services Limited, J.P. Morgan. See Additional Disclosures.

In the investment‑grade bond universe, longer‑term Treasuries and corporate bonds fared best as longer‑term interest rates declined. Mortgage‑backed securities lagged with milder gains, as falling long‑term rates led to increased mortgage prepayments and refinancing activity. Asset‑backed securities also lagged with minor gains. Municipal bonds produced positive returns but underperformed taxable bonds. High yield bonds slightly underperformed investment‑grade issues.

Stocks in developed non‑U.S. equity markets rose but slightly underperformed U.S. large‑cap shares, even though the U.S. dollar weakened against most major currencies. The MSCI EAFE Index, which measures the performance of stocks in Europe, Australasia, and the Far East, returned 3.97%. Developed European stock markets rose broadly, led by Swiss and German shares, which rose roughly 9% and 8%, respectively. UK shares lagged with a roughly 1% gain in U.S. dollar terms, with the pound sterling dropping more than 2% versus the dollar. Prime Minister Theresa May resigned on June 7 due to her inability to get Parliament to accept the Brexit deal she reached with the European Union. As of the end of June, former London mayor and Conservative Party member Boris Johnson seemed likely to win a runoff election in July and become the next prime minister. Stocks in developed Asian countries trailed European markets. Australia and Singapore led the region with returns of around 7%. Shares in Hong Kong and Japan rose about 1%.

Stocks in emerging equity markets underperformed stocks in developed markets, despite a generally weaker dollar against many emerging markets currencies. The MSCI Emerging Markets Index returned 0.74%. In Asia, Thai shares advanced more than 9%. Chinese shares declined nearly 4%, while A shares fell more than 3%, as trade tensions with the U.S. weighed on the Chinese market for most of the quarter. In emerging Europe, Russian shares soared more than 17%, helped by a late‑quarter bounce in oil prices stemming from increased U.S.‑Iran tensions and a mid‑June central bank interest rate cut. Turkish shares lagged the region with a 3% gain, hindered in part by concerns that the government’s purchase of Russian military hardware could lead to U.S. sanctions.

Non-U.S. Stock Returns
  MSCI EAFE Index MSCI Emerging Markets Index
2Q 2019 3.97%
0.74%
Year-to-Date 14.49 10.76

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of June 30, 2019; MSCI. See Additional Disclosures.

Latin American markets were mixed. Argentine shares soared nearly 32%, as several companies were added to the MSCI Emerging Markets Index at the end of May. Brazilian shares advanced 7% in dollar terms amid an increasing likelihood that pension reform legislation intended to reduce the government’s growing debt burden will become law in the months ahead. Markets in Chile, Colombia, and Peru declined. Mexican shares rose slightly more than 1%: The country was the first to ratify the United States‑Mexico‑Canada Agreement intended to replace NAFTA, and the government agreed—in response to U.S. tariff threats—to increase its efforts to stop Central American migrants from crossing Mexican territory en route to the U.S.

Bonds in developed non‑U.S. countries produced strong returns in local currency terms, as weakening economic growth and dovish signals from some central banks sent longer‑term interest rates in several countries notably lower. A weaker U.S. dollar versus various currencies enhanced returns to U.S. investors. In the eurozone, the benchmark German 10‑year yield fell deeper into negative territory to hit a series of fresh record lows as ECB President Draghi expressed willingness to resume stimulus measures. In the UK, the 10‑year gilt yield declined from 1.00% to 0.83%. In Japan, where the central bank continues to target a 0% yield for the 10‑year government bond, the 10‑year yield slipped from ‑0.08% to ‑0.16%, while the yen rose almost 3% versus the greenback.

Non-U.S. Bond Returns
  Bloomberg Barclays Global Aggregate Ex-U.S. Dollar Bond Index JPMorgan Emerging Markets Bond Index Global Diversified  JPMorgan GBI-EM Global Diversified Index
2Q 2019 3.42% 4.08% 5.64%
Year-to-Date 4.99 11.31 8.72

Past performance is not a reliable indicator of future performance.
Sources: RIMES, as of June 30, 2019; Bloomberg Index Services Limited, J.P. Morgan. See Additional Disclosures.

Bonds in emerging markets fared better than bonds issued in developed countries, as dovish signals from major central banks bolstered risk appetite. Local currency bonds outperformed dollar‑denominated issues, thanks to strength in key currencies, such as the Russian ruble, South African rand, and Brazilian real. The Turkish lira slipped more than 2%, however, as inflation remained elevated and as investors were cautious due to Turkish tensions with the U.S.

Additional Disclosures
Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). BARCLAYS® is a trademark and service mark of Barclays Bank Plc (collectively with its affiliates, “Barclays”), used under license. Bloomberg or Bloomberg’s licensors, including Barclays, own all proprietary rights in the Bloomberg Barclays Indices. Neither Bloomberg nor Barclays approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.

Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The index is used with permission. The index may not be copied, used, or distributed without J.P. Morgan’s prior written approval. Copyright © 2019, J.P. Morgan Chase & Co. All rights reserved.

London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2019. FTSE Russell is a trading name of certain of the LSE Group companies. “Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

S&P Indices are products of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”), and have been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by T. Rowe Price. T. Rowe Price is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P Indices.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Emerging markets stocks rose in the second quarter, lifted by a June rally as central banks worldwide left their key interest rates on hold or signaled future cuts in an effort to shore up their economies amid signs of slowing growth and rising trade tensions. After notching its fourth monthly gain in April, the MSCI Emerging Markets Index slumped in May as the U.S.‑China trade rift and President Trump’s threat to impose tariffs on Mexican imports raised the prospect of a prolonged economic conflict. Emerging markets stocks rebounded in June, however, after the Federal Reserve kept its benchmark interest rate steady and signaled a possible cut in the coming months. The dovish shift among global central banks reassured investors that capital would continue to flow unimpeded into the developing world. Six sectors in the MSCI Emerging Markets Index rose and five sectors declined. Financial stocks performed the best, while health care stocks fell the most.

International Indexes
     Total Returns

MSCI Index

    

2Q 2019

Year-to-Date

Emerging Markets (EM)

 

0.74%

10.76%

EM Asia

 

-1.13 9.87

EM Europe, Middle East, and Africa (EMEA)

 

7.37

13.38

EM Latin America

 

4.57

12.87

Past performance is not a reliable indicator of future performance.
All data are in U.S. dollars as of June 30, 2019.
This table is shown for illustrative purposes only and does not represent the performance of any specific security. Investors cannot invest directly in an index.
Source: MSCI. See Additional Disclosures.

Chinese Stocks Decline As U.S. Hikes Tariffs; Indian Stocks Advance on Expected Modi Reelection

  • U.S. dollar-denominated Chinese stocks and yuan‑denominated A shares declined as the U.S. and China resumed hiking tariffs on each other’s imports in May, ending months of negotiations and raising the prospect of a costly trade war.
  • Indian stocks edged higher as the domestic benchmark S&P BSE Sensex rose to a record in May on expectations that Prime Minister Narendra Modi’s ruling coalition would win a second five‑year term in the country’s general elections. In June, the Reserve Bank of India cut its benchmark repurchase rate to a nine‑year low and reduced its fiscal 2020 growth forecast after the economy grew much less than expected in the first quarter, raising pressure on Modi to revive the economy.
  • Southeast Asian markets advanced, led by a roughly 9% gain in Thai stocks, as central banks in the region stayed accommodative following disappointing economic data. Indonesia, Malaysia, the Philippines, and Thailand each reported lower economic growth in the first quarter from the previous three months as U.S.‑China trade tensions and slowing global growth weighed on the export‑driven region.

Brazilian Stocks Gain As Central Bank Holds Selic; Mexican Stocks Rise After Trade Deal Ratified

  • Brazilian stocks added more than 7%. In June, Brazil’s central bank slashed its full‑year economic growth forecast to 0.8% from its March estimate of 2%, a move that it attributed to a contraction in the first quarter, persistently weak data, and an anticipated drop in investment. The central bank’s downgrade came a week after it held its benchmark Selic rate at a record-low 6.5%.
  • Mexican stocks advanced. In June, Mexico became the first country to ratify a revised North American trade deal with the U.S. and Canada after it reached an unrelated truce with President Trump over migration earlier in the month. However, Mexico’s economy unexpectedly contracted in the first quarter from the fourth quarter of 2018, and in May the central bank cut its 2019 growth forecast for the fourth time this year to a range of 0.8% to 1.8%.
  • Andean stock markets declined as U.S.‑China trade tensions dampened the outlook for the region’s commodity‑focused economies. Central banks in Colombia and Peru left their respective benchmark lending rates on hold during the quarter, but Chile’s central bank unexpectedly slashed its benchmark rate in June by 50 basis points to 2.5%, its biggest rate cut in a decade, as the U.S.‑China trade battle weighed on copper prices.

Russian Stocks Surge As Central Bank Returns to Easing Cycle; South African Stocks Gain

  • Russian stocks climbed roughly 17% as prices for crude oil, the country’s chief export, stayed buoyant over the period and the country’s central bank reduced its key rate in June for the first time in more than a year. The central bank governor added that two more rate cuts were possible this year as Russia faces sluggish growth and slowing inflation.
  • Turkish stocks advanced despite the threat of U.S. economic sanctions following Turkey’s planned purchase of a Russian‑made antiaircraft system that the U.S. has called a risk to American‑made fighter jets. Turkey officially exited recession in the first quarter, but persistent currency weakness and possible U.S. sanctions have raised the risk that it could experience a double‑dip recession. Turkey’s central bank kept its benchmark rate at 24% during the quarter, but changes in the bank’s policy statement suggested it would loosen policy later this year.
  • South African stocks added nearly 7%. In June, South Africa reported that its economy shrank a worse‑than‑expected 3.2% in the first quarter after expanding in the prior three months as power cuts implemented by debt‑laden state utility Eskom curbed output. The quarterly contraction marked South Africa’s worst economic performance in a decade and raised the risk that the country would fall into its second recession in a year.

Solid Fundamentals in Emerging Markets Offset Near‑Term Risks

We are optimistic about the long‑term outlook for emerging markets. Most developing countries have smaller current account deficits, larger foreign exchange reserves, and more flexible currencies than they did in previous decades, reducing the risk of a financial crisis. Compared with developed markets, most emerging markets have more attractive demographics and a stronger tailwind from rising consumption. Corporate earnings in emerging markets have recovered after years of disappointing performance, and valuations for many companies are attractive compared with their developed markets peers. The recent escalation in global trade tensions and slowing global economic growth represent the most pressing near‑term risks. However, we believe that careful stock selection based on intensive research remains the key driver of long‑term performance as individual emerging markets countries and companies continue to show wide dispersion in their returns.

Additional Disclosures
MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

Tax‑free municipal bonds posted healthy returns in the second quarter of 2019, extending their robust year‑to‑date performance. The asset class benefited from a strong rally in Treasuries as well as technical support from ongoing flows into municipals and relatively low levels of new issuance. Tax‑exempt municipal debt underperformed taxable bonds over the period, with the Bloomberg Barclays Municipal Bond Index returning 2.14% versus 3.08% for the Bloomberg Barclays U.S. Aggregate Bond Index. High yield municipal bonds outperformed investment‑grade munis but lagged investment‑grade taxable bonds for the quarter.

Economy And Interest Rates

The Fed left its short‑term lending rate unchanged at its two meetings during the period, but at its June meeting the central bank signaled that a cut may be imminent, noting increased uncertainties around the economic outlook. The central bank’s policymakers, who had previously said they would be “patient” in their approach to interest rate adjustments, instead said that they “will act as appropriate to sustain the expansion,” implying a willingness to cut rates if needed. Although the unemployment rate was near a 50‑year low, signs of slowing economic growth and concerns about the impact of the U.S.‑China trade dispute also contributed to the price gains in safe‑haven government bonds during the quarter.

Municipal yields decreased steeply in the second quarter, with yields falling fairly uniformly across the yield curve. Treasury yields decreased even more markedly, with the largest changes in the intermediate‑maturity section of the yield curve. The three‑month/10‑year portion of the Treasury yield curve was inverted during much of the period—meaning the shorter‑maturity security offered a higher yield than the longer one. An inversion of this part of the curve has often foreshadowed recessions in the past, although the indicator has also given false signals and the start of a downturn can lag an inversion by a significant amount of time. The two‑year/10‑year segment of the curve, which is also closely watched as an indicator of the health of the economy, did not invert. At the end of the quarter, high‑quality 30‑year muni yields were lower than the 30‑year Treasury yield. Nonetheless, municipals still offer relative value for many fixed income investors on an after‑tax basis.

As an illustration of their relative attractiveness, on June 30, 2019, the 2.31% yield offered by a 30‑year tax‑free general obligation (GO) bond rated AAA was about 92% of the 2.52% pretax yield offered by a 30‑year Treasury bond. Including the 3.8% net investment income tax that took effect in 2013 as part of the Affordable Care Act, the top marginal federal tax rate (after the 2017 tax reform legislation) stood at 40.8%. An investor in this tax bracket would need to invest in a taxable bond of similar credit quality and maturity yielding about 3.90% to receive the same after‑tax income as that generated by the municipal bond. (To calculate a municipal bond’s taxable‑equivalent yield, divide the yield by the quantity of 1.00 minus your federal tax bracket expressed as a decimal—in this case, 1.00–0.408, or 0.592.)

Municipal Market News

Total municipal bond issuance for the quarter was about USD 89 billion, according to The Bond Buyer, a decrease of 11% from the low levels of the same period in 2018. Coupled with the relatively limited amount of new supply, continuing strong demand for munis helped create favorable supply/demand conditions. Cash flowed into the asset class at a record pace in the first half of 2019, while the overall supply of bonds has declined slightly as bonds matured or were redeemed early at a faster pace than new deals reached the market.

Generally, fundamentals for municipal issuers remain solid, and most issuers in the USD 3.8 trillion municipal bond market have been fiscally responsible. State and local governments, in general, have been cautious about adding to indebtedness since the financial crisis, and a strengthening economy has helped tax revenues rebound. Over 60% of the market, as measured by the Bloomberg Barclays Municipal Bond Index, is AAA or AA rated.

While we believe that many states deserve high credit ratings and will be able to continue servicing their debts, we have longer‑term concerns about significant funding shortfalls for pensions and other post‑employment benefits obligations in some jurisdictions. Although few large plans are at risk of insolvency in the near term, the magnitude of unfunded liabilities is becoming more conspicuous in a few states.

Lower‑rated segments of the muni market, including Puerto Rico debt, outperformed for the quarter. Uninsured Puerto Rico municipal bonds posted modestly better returns than the broad high yield municipal index. Municipal debt from Illinois and New Jersey, which are both facing higher‑than‑average levels of fiscal stress, outperformed the investment‑grade muni market. In early June, Illinois passed a state budget for the next fiscal year with relatively little difficulty, while New Jersey enacted its new budget at the end of June, averting a threatened state government shutdown.

All major investment‑grade segments of the municipal market recorded solid gains in the second quarter. Revenue bonds outperformed GO debt, while prerefunded bonds lagged the broad municipal market. We continue to favor bonds backed by a dedicated revenue stream over GOs, as we consider revenue bonds to be largely insulated from the pension funding concerns facing state and local governments. Across our municipal platform, we have an overweight to the higher‑yielding health care and transportation revenue‑backed sectors. Within revenue bonds, the industrial revenue, hospital, and leasing subsectors generated the best returns, while the resource recovery, power, and water and sewer subsectors lagged the broader index. High yield tobacco debt outperformed investment‑grade munis but underperformed the noninvestment‑grade municipal bond market.

OUTLOOK

Despite some high‑profile credit challenges, we believe that municipal debt overall remains a high‑quality market that offers good opportunities for long‑term investors seeking tax‑free income. Although the market continues to assess the long‑term impact of the Tax Cuts and Jobs Act passed in December 2017, tax reform has altered not only issuance patterns, but also the economics of owning tax‑free securities for some buyers. However, fundamentals for the asset class are generally sound.

Given the Fed’s increasingly dovish stance due to uncertainties about the economic outlook and weaker data, muni and Treasury bond yields could shift lower in the coming months. The same global economic uncertainties, coupled with heightened geopolitical tensions, could spur demand for safe‑haven assets such as municipal bonds.

Ultimately, we believe T. Rowe Price’s independent credit research is our greatest strength and will remain an asset for our investors as we navigate the current market environment. As always, we focus on finding attractively valued bonds issued by municipalities with good long‑term fundamentals—an investment strategy that we believe will continue to serve our investors well.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are as of the date written and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance is not a reliable indicator of future performance. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

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