The momentum of the first quarter carried over into the second, with the S&P 500 returning 3.9% in April. As optimism over a potential trade deal with China gave way to fears of increased tariffs and a further ratcheting up of the trade war, the market cracked – falling -6.6% in May. A pledge to return to the bargaining table plus indications that the Fed was preparing to cut rates then managed to turn the market around. When the dust settled, the S&P recorded its best June since 1955 and the market saw the best first half returns in 22 years. Leadership seesawed throughout the quarter. In April and June, when trade tensions eased and the consequent expectations for global growth improved, value outperformed growth and smaller capitalization stocks did as well as or better than large cap. Overall, however, investors continued to seek relative safety in US large cap companies with reliable growth prospects. Trade issues continued to have an outsized effect on both developed and emerging international stocks, as those economies are more dependent on international trade than the US.
Coming off the worst December performance in 80 years, and the first negative total annual return for domestic markets since 2008, investor sentiment had turned decidedly negative. Add to the December swoon a government shutdown, escalating trade tensions with China and Europe, concerns over monetary policy and a synchronized global slowdown and the outlook was indeed bleak. With fears of an impending worldwide recession and associated bear market forecasts, stocks did what they do best and began to climb the proverbial wall of worry. One by one, threats that had sent the market into a year-end tailspin failed to materialize or were resolved positively – leading stocks higher each successive month. The quarter ended a few percentage points below last year’s all time highs. With fears of a recession off the table, growth stocks resumed their dominance over value stocks. Concerns over US growth dented small-cap stocks in March, but they still bested their larger peers for the quarter. International stocks were mixed; growth concerns were an overall weight while bellwethers like China roared higher in the quarter. US stocks again outpaced the rest of the world.