2019 Q2 Quarterly Update

In the second quarter of 2019, global equity markets continued to move higher, despite concerns of slowing global growth. The MSCI All Country World Index, a barometer of equity-market performance throughout the developed and emerging countries, posted a healthy 3.80% return for the quarter, bringing the year to date returns for the index to 16.60%.

A closer look at various major equity markets shows the S&P 500 Index registered strong gains, returning 4.30% for the quarter and 18.54% for the year so far. In U.S. dollar terms, developed international markets, as measured by MSCI Europe, Australasia and Far East Index, trailed slightly, generating 3.97%. Year to date, the international index produced a healthy 14.49% – a welcome change from the preceding five years. U.S. small capitalization stocks continue to follow right behind the S&P 500, returning 2.10% for the quarter and 16.98% since January 1st. Emerging market stocks returned just 0.74% for the quarter, but still reported a very respectable 10.78% for the year to date.

It appears investors have not lost their interest in publicly traded U.S. Real Estate Investment Trusts. The FTSE NAREIT All Equity REIT Index returned 1.72% for the quarter, bringing year to date returns to a handsome 19.30%.

According to the Federal Reserve Bank of Saint Louis, the 10-year U.S. Treasury note ended the quarter with a yield of 2.00%, down from 2.49% at the beginning of the quarter and 2.66% in January. The broader U.S. bond market, as measured by the Bloomberg Barclays U.S. Aggregate Bond Market Index, returned 3.08% for the quarter and 6.11% for the first half of the year.

Internationally, government bond yields continued to fall, highlighted by the 10-year German bond, which ended the quarter at an unimaginable yield of -0.33%. As previously mentioned, falling yields equate to higher bond prices. The FTSE World Government Bond Index, which measures global bond market total returns, earned 3.57% for the quarter and 5.38% since the beginning of the year, both in US dollar terms.

What’s next for the economy and the markets?

As we write, rumors of a pending reduction in interest rates by the Federal Reserve have been swirling. No matter what the Fed decides to do, it will base its decision on predictions by its vast team of top-drawer economists. As they find their way into Fed policy, those predictions will affect all of us, not just as investors, but as workers, borrowers, taxpayers, and consumers.

How good are those predictions? They are almost certainly lousy.

Beginning in 1984, Philip Tetlock began a longitudinal study of expert predictions in fields related to politics and economics. He amassed a database of more than 80,000 predictions; quite a few were supported by expert access to classified information. The conclusion: experts are terrible at predictions. Of outcomes the experts predicted were impossible, 15% came to pass; of outcomes they predicted were a sure thing, more than 25% failed to happen. Of particular note, for investors:

One study compiled a decade of annual dollar-to-euro exchange-rate predictions made by 22 international banks: Barclays, Citigroup, JPMorgan Chase, and others. Each year, every bank predicted the end-of-year exchange rate. The banks missed every single change of direction in the exchange rate. In six of the 10 years, the true exchange rate fell outside the entire range of all 22 bank forecasts.[1]

This is why we are not going to predict what happens next for the economy, the broad market, or any section of the market. It is why we are going to continue to recommend diversifying away all risks generated by such predictions.

[1] Epstein, David: The Peculiar Blindness of Experts. The Atlantic, June 2019. theatlantic.com/magazine/archive/2019/06/how-to-predict-the-future/588040/.


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