While investors in gold may find it gratifying to see the price of bullion rise after moving sideways for six years, we make no prediction about whether the recent uptrend will continue. Around the globe, there are many unresolved issues—including financial, monetary and political developments in Europe—that could create significant volatility in financial markets and in the short-term price of gold.
Following an inadvertent tilt to cyclical value stocks in 2018, we have focused on returning the portfolio to its customary position of balance, where individual stock elements may be the determinant factors in stock performance rather than the macroeconomic environment. While the economic background will always influence stocks, ideally, we look for stocks where the stories of corporate change can transcend the macroeconomic environment.
Over the course of the quarter, macroeconomic developments exerted a powerful pull on the markets. In April, better-thanexpected economic data and accommodative central banks allayed concerns about global growth and propelled a rebound in risk assets. In May escalation of the US/China trade dispute darkened the outlook for global growth, sending stock markets lower and prompting rallies in perceived “safe haven” assets such as Treasuries and the Japanese yen. In June, more explicitly dovish comments from the Federal Reserve assuaged investors’ concerns and sent markets higher.
Despite a downturn in May, the second quarter as a whole was a positive one for investment markets: global equities generally rose, credit spreads remained tight and implied equity volatility (as measured by the CBOE Volatility Index) was well below average. Interest rates remained extremely low both in the United States and abroad—particularly in Europe, where some $13 trillion of bonds are trading at negative yields.1 In addition to equities and bonds, currencies also experienced unusually subdued levels of volatility
Primary issuance picked up in the high yield market; proceeds were used largely for refinancing, which is a sign of health, and issuance quality remained surprisingly high for this late point in the credit cycle. Leveraged loan issuers were on a different course, however, and the leverage on new loans reached an all-time high.