Second Quarter 2019
Looking back, the markets remained volatile during the quarter, after one of the strongest starts to the year, as investor sentiment oscillated with each passing headline. Growth concerns were temporarily placated with the initial U.S. GDP estimate exceeding forecasts at 3.2 percent for the first quarter of 2019, though that marked the high point for expectations. Corporations reported better than expected earnings, with management teams expressing caution regarding implications from moderating growth and disruptions from the trade dispute. Optimism around a potential trade deal was crushed as negotiations collapsed, with little progress made during the quarter. Hope rested on the G-20 meeting that happened over the last weekend in June, which produced some progress towards a resolution. These headwinds culminated in pressures on interest rates as investors moved into safe-haven assets, which sent the yield on the 10-year treasury to multi-year lows below 2 percent. Inflation has remained relatively tame, further bolstering confidence in the Federal Reserve’s pivot towards easier monetary policy and the likelihood of meaningful cuts to their benchmark rate during 2019.
Looking forward to the second half of 2019, positive corporate earnings growth still remains the most likely outcome for the full year. However, growth for earnings is increasingly dependent on an acceleration into the end of the year, as the upcoming quarterly estimate has fallen and is now flat with the prior year’s earnings. Tight labor markets and a rebound in housing from lower interest rates has continued to underpin the strength in the U.S. consumer despite the market concerns. Investors are likely to be focused on company outlooks for the remainder of the year as these issues begin to show a greater impact on their earnings and cashflows. As the economic cycle continues to progress later and later, the preference for high-quality, cash-generative businesses is likely to increase as markets become increasingly concerned for those companies with more challenged models where leverage is high, or cash generation is lower. These differences, we believe, will cause further dispersion in returns between securities, while avoiding those most exposed to a key driver of investor returns. We remain vigilant in assessing absolute risk in the securities we invest in and striving to protect client capital during these times for potential volatility from the uncertainty.
Within the S&P 500 Index, every sector posted positive returns during the second quarter except Energy, which was the lone decliner. Financials, Materials, and Information Technology all rallied the most during the quarter.
The portfolio’s relative performance was aided by strong stock selection in Health Care and Information Technology. Cable One rallied as their shift towards growing high-speed data customers continued to boost margins and drive higher cash flow. DENTSPLY SIRONA moved higher on evidence of firming in the underlying end-market demand for their dental products. STERIS saw strong execution and solid growth across their healthcare product spectrum including capital equipment. Amdocs reported better-than-expected results as investors cheered their drop in unbilled receivables, which had been a concern. Intercontinental Exchange moved higher on solid organic growth within their data segment as earnings beat expectations and sales came in towards the high end of management’s guided range.
Unfavorable stock selection in Consumer Discretionary and Real Estate weighed on relative performance. Mall owners, like Simon Property Group, continued to be pressured by store closures and bankruptcies from mall-centric retail operators. Pentair fell as earnings fell short of expectations due to unfavorable weather and high inventory levels within their aquatic systems division. Energizer Holdings reported mixed results as management pointed to volatility with their recently acquired set of battery businesses as a culprit. Genuine Parts saw strength in their U.S. auto business overwhelmed by weakness in Europe and some moderation in their industrial distribution segment. Advance Auto Parts also saw better results in their U.S. auto parts business but investor concerns over the broader light vehicle cycle and upcoming difficult comparisons weighed on shares.
Past performance is not indicative of future results. Portfolio returns reflect the reinvestment of dividend and interest income. All information provided is for informational purposes only and is not intended to be, and should not be interpreted as, an offer, solicitation, or recommendation to buy or sell or otherwise invest in any of the securities/sectors/countries that may be mentioned. A description of the methodology used to calculate the attribution analysis or a complete list of each holding’s contribution to overall performance during the measurement period may be obtained by contacting email@example.com. Benchmark Data Source: © 2019 FactSet Research Systems Inc. All Rights Reserved. Russell Investment Group is the owner of the trademarks, service marks, and copyrights related to its indexes, which have been licensed for use by Westwood.