The end of July and beginning of August has proven to be very tricky. The S&P 500(1) declined almost 100 points. Bond yields plunged almost 25 basis points. Some of the culprits behind these movements included Federal Reserve Chairman Powell’s “mid-cycle adjustment” comment post the recent rate cut, and Trump’s new tariffs announcement. A number of significant problems including tariffs, a global slowdown, an inverted U.S. yield curve, Brexit, upcoming Japan VAT hike, too-low inflation, Hong Kong unrest and 2020 election uncertainties are on investors’ minds. Offsetting that, the Federal Reserve, ECB, and Bank of Japan balance sheets are set to increase tens of billions of dollars per month going forward.
For July, the S&P 500(1) gained 1.3%, while the MSCI EAFE Net Index(2) of developed international equities lost -1.3% and Emerging Markets Net Index(2) declined -1.2%. The Barclays U.S. Aggregate Total Return Index (1) returned +0.2% last month. The Barclays US High Yield Index(3) increased 0.6% for the month.
As a part of our normal portfolio management, we re-balanced client portfolios in July amid conflicting outlooks from a generally resilient stock market versus pessimistic economic signals in the fixed income world. These ostensibly opposing stances are pretty common in the later stages of an economic cycle and we do not expect an imminent recession. Rather, our actions focused on harvesting gains to support the diversification that we have talked about most of the year.
With a new high of 3000 points in July, the S&P 500 Index is far outpacing international stocks, based upon the iShares MSCI ACWI ex U.S. ETF (ACWX), year-to-date. Accordingly, our portfolios maintained a generous weighting to international and, in particular, emerging markets. We did trim exposure to Japanese equities where risks are tilted downward. With U.S. Treasuries yielding around 2% across most parts of the yield curve and inverted at certain points, we added investments in funds with a bias to owning bonds under five years maturity. One “value-add” position (TPYP) is in the Midstream energy sector, where long-term fundamentals are appealing given significant required upgrades to North American oil and gas infrastructure.
As we progress further into the third quarter and what we believe the later stages/ innings of this bull market, we are starting to be a bit more defensive. Global equity and fixed income markets have posted strong gains year to date. It is reasonable to reduce exposure to assets where returns have exceeded expectations. Presently, we are identifying additional assets that can help in times of increased volatility like we experienced in early August.
After 10 years of relative calm, investors are not used to these types of market movements which were normal prior to the Great Financial Crisis. Nonetheless, a diversified and sensible portfolio can navigate past the negatively skewed risks associated with the late innings of an economic cycle which can offer positive returns for investors for an extended period before the final out is called.