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MESSAGE FROM THE PRESIDENT TOM L. STRINGFELLOW, CFA®, CFP®, CPA, CIC

President

The following has been compiled from information and comments provided by the investment professionals of Frost Investment Advisors:

Halfway There…

We’ve ridden a few S&P 500 market highs and lows over the past six months, and I suspect the last half of 2019 will deliver more of the same. Recall that investors began 2019 on the tail- end of what had been a merry-less December decline of around -9 percent. And while January quickly recovered most year-end losses with a positive rise of +8.01 percent (total return), followed by respectable low single digit gains in February, March and April, the month of May then tripped -up investors with a surprise decline of -6.35 percent. Admittedly, this last month’s rebound (June) was unexpected. The month posted a positive 7.05 percent return, which added another all-time index high in the S&P 500 to the record books and delivered its best first half performance since 1997. The rally wasn’t isolated to the U.S. markets either, as global investors finished the quarter with positive returns across most major foreign indexes.

It is not surprising with an erratic dispersion in monthly returns that investors have become even more sensitive to market fears. Roughly $90 billion exited actively managed equity funds, although an estimated $39 billion found its way back into the passive markets. There were a number of market and economic potholes along the way that we’ve already discussed, including the ongoing trade tiffs, inverted yield curve warnings, a downturn in manufacturing data, and most recently an acceleration in negative corporate earnings estimates. Unfortunately those investors who have opted out of the market during this extended recovery have discovered that volatility market-timing seldom proves to be a tactically successful strategy.

In more recent news, personal income growth strengthened in May, rising +0.5 percent and mirroring the increase in April. Wage and salary income was up a positive +0.2 percent, although posting the weakest one month gain since November. Over the last three months real consumption has advanced 5.4 percent at an annual rate, while the personal saving rate has dropped a full percentage point. Meanwhile, pending home sales booked their first increase in four months, up +1.1 percent in May. Another positive headline from last week was the final Q1 GDP revision, remaining unchanged at an annualized growth rate of 3.1 percent with a downward revision in real consumer spending (+0.9 percent vs. +1.3 percent) offset by upward capex revisions (+4.4 percent vs. +2.3 percent). Meanwhile the New York Fed Nowcast model is forecasting a +1.3 percent for 2019, Q2 and +1.2 percent for 2019, Q3.

On the negative front, disappointing news from the Conference Board’s consumer confidence measure showed a sharp drop in both present conditions and expectations. This finding contrasts with the Bloomberg Consumer Comfort Index, which just hit a fresh nearly two-decade high. Data from the manufacturing sector was weak, highlighting that all five regional Federal Reserve manufacturing indexes fell in June. The message was consistent with a drop in new orders and backlogs in orders. The New York state index turned negative for the first time since October 2016, while the Dallas Fed Manufacturing Index fell well below consensus estimates (-12.1 versus the prior month of -5.3 versus the consensus of 1.0).

The market outlook contains a number of positives that could continue the momentum that has driven the major equity indices to records, including seasonal tailwinds that have supported equities during the latter half of the last ten years following the 2007-2009 recession. Other near-term positives include low interest rates, an accommodative central bank, housing markets (courtesy of lower rates), still stellar consumer confidence rates and of course, job market strength.

M A R K E T N E W S & V I E W S W E E K O F J U L Y 1 , 2 0 1 9

M A R K E T C O M M E N T A R Y

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There is also the outside chance that President Trump and Chinese President Xi Jinping will be able to turn their most recent G-20 meeting into a more lasting trade truce. At this point, the U.S. is postponing 25 percent tariffs on $300 billion worth of Chinese goods not currently subject to duties, while China will start purchasing American agricultural products. Trump also agreed to allow U.S. companies to sell products to Huawei to encourage Xi to resume formal negotiations. The 25 percent tariff on $250 billion worth of Chinese goods currently in place will continue.

So, what is the state of the current post-recession recovery? The timing of its demise is still subject to considerable news and noise. Much of the skeptical commentary relates to its extended time- frame. On that note, the current economic expansion is now the longest on record, beating the 40-quarter expansion of the 1990’s and, according to one research source (Bank of America/Merrill Lynch), this is now the longest growth stretch since the Civil War. Other notables include:

Domestic spending on stock buybacks since 2009 now totals $5.4 trillion.

Corporate debt issuance since 2009 totals $15 trillion.

Global debt as a percentage of global GDP is at an all-time high of 317 percent.

The number of global rate cuts since the 2008 global financial crisis amounts to 715 cuts.

Please note that there will not be a News and Views edition next week. We will resume on July 15.

THE PAST WEEK IN CHARTS

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MARKET PERFORMANCE

Key Market Indices Last Chg % Chg 1 Week

Chg 1 Week % Chg

1 Mth % Chg

YTD % Chg

12 Mth % Chg

52 Wk High

52 Wk Low

S&P 500 2,941.76 16.84 0.58 -8.70 -0.29 4.97 17.35 8.30 2,964.15 2,346.58 Bloomberg Barclays US Agg 104.70 0.02 0.05 0.37 0.43 1.90 6.11 7.91 104.70 97.85 Bloomberg Barclays Glbl Agg x US 112.41 0.10 0.26 0.03 0.51 3.37 4.98 4.67 112.61 107.62 MSCI AC World Ex US 363.50 0.64 0.19 0.00 0.15 3.04 13.28 3.57 374.86 321.86

WHAT WE ARE WATCHING

Key Events: This week is U.S. ISM manufacturing survey and the labor market update. July 4, Independence Day, markets are closed.

Geopolitical: As the week opens, we should hear if any agreement has been reached between President Trump and Premier Xi of China by close of the G20 in Osaka.

U.S.: ISM mfg survey, trade balance, factory orders, jobs report.

Eurozone: Mfg PMI, unemployment, retail sales. Germany Mfg PMI, u/empl, retail sales, factory orders.

Japan: BoJ Tankan survey.

China: Mfg PMI.

Central Banks: RBA policy meeting.

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TOPICAL READS

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