The S&P 500 Index generated a total return of +18.5 percent for the first six of 2019, the strongest first half performance since 1997. Equity investor enthusiasm is based on, in large part, the hope that Fed easing will not only extend the U.S expansion, but also compel global central banks to respond in kind, further driving down interest rates. The combination of meager or, in many cases, negative bond yields and rising liquidity will push investors to risk assets to achieve adequate returns (via the TINA, or there is no alternative, effect), possibly resulting in a “melt up” in equities. U.S. growth continues to moderate from difficult year-over-year comparisons due in large part to fading fiscal stimulus, lagged effects of monetary tightening, and persistent trade policy uncertainty. Measures of current economic activity signify a notable downshift in GDP growth post the breakdown in U.S.-China trade negotiations in early May and resumption of earlier-postponed tariff hikes. Whereas the consensus real GDP growth forecast for 2Q19 is currently +1.8 percent, down from +2.5 percent on May 1, the Atlanta Fed’s GDPNow model infers growth closer to +1.3 percent.  An eventual trade deal remains our base case as we believe neither side can withstand the economic pain of a long-term conflict. Still, persistent trade policy uncertainty continues to weigh on business investment and raises the odds of a global downturn.  Despite mounting headwinds, the economy currently remains in solid shape and there are reasons to believe the expansion has more room to run if there is a timely trade conflict resolution and the Federal Reserve eases policy.

For more details, including a longer discussion of dividend growth stocks, please see Sit Investment Associates’ July 2019 Global Investment Outlook and Strategy paper. Click here: Global Outlook and Strategy (Adobe Acrobat) or e-mail us at: siainfo@sitinvest.com.