The second quarter of the year finished off in a very similar fashion to the way the first quarter did: with strong positive returns. All the major stock indices for both quarter and year to date periods were up sharply, as we now look into the second half of the year.
Now that we’re a few weeks into the beginning of the third quarter, equities continue breaking through all time highs. The positive economic news hasn’t stopped. Unemployment remains incredibly low, inflation continues to be stable, and the threat of a tariff war hasn’t translated to downward pressure on market prices. Yet, at least.
Interestingly, the US Treasury yield curve is inverted, as the yield on short term notes is higher than the yield on longer term bonds. As I wrote about last quarter, long term bond yields reflect the market’s impression of the long term economic outlook. And with longer term yields under pressure, there continues to be a disconnect between what the bond market and stock market are signalling. Bond markets appear to believe a slowdown is on the horizon, while the stock market is plowing ahead and not looking back.
Elsewhere in the world, stocks in developed international economies and emerging economies were both up, but trailed the US. We’re now at a point where the valuation spread between US and non-US equities is the largest it’s been in over 40 years. In other words, stocks from non-US countries are the cheapest they’ve been compared to US stocks for a very long time. This is one of the reasons I advocate for a globally diversified portfolio, and urge my clients to maintain a balanced approach. It’s far more likely that US stocks will underperform international stocks over the next decade.