Reversing their sharp declines from May, global equity markets came roaring back in June as global central banks appeared more accommodative because of subdued inflation, ongoing trade war anxieties and waning economic data. The S&P 500(1) gained 7%, while the MSCI EAFE Net Index(2) of developed international equities and Emerging Markets Net Index(2) were up about 6% in June. Underscoring a good quarter, the indices that we track made second quarter gains ranging from approximately 1% to 5%. Interestingly, the MSCI Frontier Markets Net Index(2) did best at 4.7%, while the Emerging Markets Net Index(2) did the worst at 0.6%. In the Frontier Markets, Eastern European and CIS countries did the best while Vietnam which might benefit from the trade war with China lost money given a lessening of tensions. For the quarter, the S&P 500(1) rose 3.8% while MSCI EAFE Net Index(2) increased 3.7%. Year-to-date through June 30, the indices are up between 11-19%.
After a shocking reduction in global interest rates in May, the rally in fixed income also extended to June. The 10-year and 30-year Treasury yields (1) fell 14 basis points and six basis points, respectively. While the Federal Reserve has yet to do any rate cuts, investors have pushed the yield on the 10-year T-note down from 2.51% at the close on 4/30/19 to 2.00% on 6/28/19, or 51 bps, according to Bloomberg. In Germany and Japan, 10-year yields(3) fell further to -0.44% and -0.16%, respectively, highlighting that in parts of the developed world, investors pay to store their money in “safe” government debt. The Barclays US Aggregate Total Return Index (1) returned 3% for the second quarter and 6% year-to-date through June.
In credit and real assets, the snap back in value focused on the riskiest assets. Credit spread spreads fell in most types of credit products with the largest decline in lower-rated debt. The Barclays US High Yield Index spread(3) declined 56 basis points to 3.77%, returning 2.3% for the month. In emerging markets, local currency debt rallied, with the JPM GBI-EM Global Diversified Index(3) up 5.5% in June, as Emerging Market currencies broadly strengthened against the dollar. Within real assets, Crude Oil(3) increased 9.2% to $58, bringing year-to-date gains to a robust 29.4%.
CNBC reported that, as of 7/1/19, the current economic expansion will become the longest in U.S. history, breaking the previous record of 120 months of growth from March 1991 to March 2001, according to data from the National Bureau of Economic Research. Although Central Banks around the globe may lengthen this expansion, we believe that the U.S. remains firmly in the late stage of the market cycle. Risks continues to escalate, in our opinion, with the yield curve firmly inverted at both the May and June month-ends. This is worse than in first quarter when an intra-month inversion occurred in March, but no month-end inversion was present. A month-end inversion preceded the last seven US recessions, with no false signals.
We continue to remind investors of the importance of diversification and the volatility historically associated with this stage of the cycle. May’s losses and June’s gains highlight the volatility that we expect.