Quarter Review Article

2019 Q2 Market Review

Quarter Review Article

After logging strong returns in the opening three months of 2019, global equity markets slowed in the second quarter. Still, major indexes across the world ended Q2 in positive territory.

The U.S. blue chip S&P 500 returned 4.30% in the second quarter, cooling off from a white-hot 13.53% gain in the previous quarter. That mirrored the IFA Large Company Index's 4.30% rise in Q2 as compared to its 13.63% jump in the opening quarter.

Major financial news in the second quarter highlighted data showing dampened economic growth in key markets across the world, a breakdown in U.S.-China trade talks, growth in the U.S. federal budget deficit and a drop in growth of domestic housing prices. Even so, the S&P 500 produced its best first-half performance in 22 years by gaining 18.51%, in-part due to rising expectations of an interest-rate cut by the Federal Reserve.

But investors trying to glean any clues to longer-term market price trends from such blips in geopolitical events might want to remember an important lesson of academic research by University of Chicago professor Eugene Fama. As the 2013 Nobel Laureate put it years ago (see video below), "prices reflect all available information so that ... it is basically impossible to beat the market ... because investors are always paying fair prices."

He added: "So the task of investors is simplified -- they just have to decide how much risk they want to take to get more or less expected return. Investors don't need to worry about picking stocks or timing the market because they can operate under a presumption that stocks will be fairly priced."

Of course, IFA keeps its eye on market ripples. At the same time, we keep in-mind the importance of taking a long-term and evidence-based investment approach to markets.

Along these lines, we'd urge you to re-examine IFA Founder Mark Hebner's article detailing his work on developing a model to help create a framework for explaining to investors how market pricing dynamics work in everyday application.

Domestic Equities

The plight of U.S. stocks in Q2 serve as another example of how fluid and unpredictable market conditions are over shorter timeframes. After hyperactive growth in the opening three months of 2019, all IFA domestic stock indexes kept gaining ground in the second quarter. While not as robust as earlier in the year, returns in Q2 finished higher. Gains in the quarter ranged from 4.30% for IFA's U.S. Large Company Index to slightly less than 1% for its sister small-cap value benchmark. IFA's domestic large-cap growth equities index produced a 4.75% return and IFA's small-cap growth index rose by 3.81%. Meanwhile, large-cap value stocks as measured by IFA's index increased in Q2 by 3.09%.

International (Developed) Equities

IFA index returns from developed countries that are outside the United States all produced positive results in the second quarter of 2019. In Q2, results included a gain of 2.18% for IFA's benchmark of blended small-cap international equities and a rise of 1.47% for its benchmark of international large-cap value stocks. That was quite a slower growth pace from the previous quarter. But international developed stocks included in IFA's portfolios finished the quarter with double-digit percentage gains in terms of year-to-date returns.

Emerging Markets Equities

Emerging Markets also managed to post slight gains for IFA investors in the quarter. For Q2, these IFA index returns included a gain of 0.85% for emerging markets large-cap equities and a rise of 0.77% for emerging markets blended small-cap equities. Still, 2019 returns at quarter's end were in the mid-teens percentage wise: the large-cap benchmark tracking this asset class ended Q2 up for the year by 9.11% while emerging markets small-cap stocks finished up by 9.64%.

Real Estate Equities

Global real estate was another example in Q2 of the broad benefits in sticking to a longer-term investment plan and not reacting to short-term market gyrations. In the quarter, IFA's Global REIT Index returned 1.82%. That was less than Q1's better-than 15% rise, but still enough to keep global real estate stocks in IFA portfolios ahead by 17.30% on the year at the second quarter's close.


In the second quarter, the 30-year U.S. Treasury rate decreased by 37 basis points while the five-year U.S. Treasury rate decreased by 55 basis points.

For Q2, the four different bond funds used by IFA delivered returns ranging from 1.40% for the IFA Five-Year Global Fixed-Income Index to 0.57% for the IFA One-Year Short-Term Fixed-Income Index. If interest rates have increased, the price of existing bonds with a lower coupon rate usually can be expected to decrease so that new buyers of the bonds can get the same total return (capital gains plus interest) as that available from newly issued bonds at the higher rate and at similar risk. When interest rates decrease, the price of existing bonds typically increase.

IFA Index Portfolios

The returns of the IFA Index Portfolios are shown below net of the maximum annual 0.90% advisory fee through June 30, 2019. Reflecting positive performances across indexes in both equity and fixed-income categories, each continued to post relatively solid year-to-date results by the end of the second quarter.  

Given the recent underperformance in U.S. value stocks as compared to growth stocks in both large and small companies, some IFA clients may be wary about their tilt toward small and value companies. The chart below shows monthly rolling period returns of the IFA U.S. Small Cap Value Index versus the IFA U.S. Large Cap Growth Index for the last 50 years.

Over rolling one-month periods, it has been a toss-up between Large Cap Growth and Small Cap Value. But once we expand our view to longer time horizons, you can see that small value was the better index to own.

Each quarter, IFA monitors the funds they recommend for clients and as part of that process, we've developed a rating system. Below is a link to our Performance Monitoring Report for client portfolios: IFA Second Quarter 2019 IFA Client Performance Monitoring Report.

We've created the Investing Kit that includes a copy of "Index Funds: The 12-Step Recovery Program for Active Investors" book and documentary film based on the book, as well as the Galton Board, Stock Market Edition, which simulates the distribution of 600 monthly returns right before your very eyes.

This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There is no guarantee investment strategies will be successful.  Investing involves risks, including possible loss of principal. IFA Index Portfolios are recommended based on time horizon and risk tolerance. Take the IFA Risk Capacity Survey (www.ifa.com/survey) to determine which portfolio captures the right mix of stock and bond funds best suited to you.  For more information about Index Fund Advisors, Inc, please review our brochure at https://www.adviserinfo.sec.gov/