Market Commentary - August 2019

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As good of a year 2017 was for equity markets, 2019 is on pace to be even better. Obviously there is a long way to go and while the performance of the first seven months of has no bearing on the remaining five, what a run it has been! With the US Federal Reserve and the European Central Bank likely planning further rate cuts it seems central banks are not ready to let go of low rates. Mixed corporate earnings and the ongoing trade war seem to be on the back burner and the market is focusing on rate cuts and more stimulus.... for now.

While 2017 was an exceptional year, only Emerging Markets, European Markets & the S&P 500 experienced 20%+ returns. Many asset classes and sectors did not fully participate and a few actually experienced negative returns. 2019 has been a different story as equities have rallied across the board along with REIT's, commodities & bonds. These did not participate in much of 2017's rally and are on pace for their best returns this decade. Nearly every S&P 500 sector is already up double digits for the year. While it's extremely rare for all equity asset classes to experience positive returns in the same year, that is exactly what has transpired so far this year. While higher asset prices are always welcomed, there seems to be a disconnect between asset prices and the underlying fundamentals.

As discussed in my May market commentary, bonds were off to a great start for the year and the returns have only increased over past three months as central banks have doubled down on additional stimulus and rate cuts which in turn makes bonds "more attractive". Many bonds are increasing in value not based on their fundamentals, but more so because there is not a better alternative. Cash rates do not appear to be going any higher anytime soon.

It is important to remember markets can be irrational for extended periods of time and just when people think they have things figured out, the opposite occurs. John Maynard Keynes' great quote is very appropriate here, "The market can remain irrational longer than you can remain solvent." While returns this year have been stellar, it is important to keep things in perspective and remember how quickly things can change. At some point the pro-stimulus central banks will run out of stimulus to pump into economies. The global economy will need to stand on its own.