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Second-Quarter 2019 Market Trends Point to Uncertainty

Industry Trends and Research

Market indicatorsOngoing volatility in global-equity markets, along with the Fed’s increasingly dovish policy bias, exposed a continuing trend of rising uncertainty, according to the latest Morningstar Markets Observer.

Each quarter, the firm’s quantitative research team reviews the most recent market trends in finance and evaluates the performance of individual asset classes. In “Quarterly Market Commentary: 6 Key Market Trends in 2019,” Morningstar’s Amrutha Alladi summarizes the key findings from the second-quarter 2019.  

Market performance hasn’t lived up to great expectations. Here, Alladi notes that negative-data surprises have “partially led to increasing pessimism about market performance.” Both emerging- and developed-market stocks have been below the median forecast for most of 2019, as shown in Citi’s Economic Surprise Indices included in the report. “While these indexes are certainly correlated with market sentiment, it isn’t clear whether they have any predictive power regarding the business cycle,” the report notes.  

Labor supply, taxes and regulations remain top challenges for U.S. small businesses. The recovered economy and tightened labor market have led labor quality to replace sales as one of the biggest challenges facing small businesses, according to Morningstar. “While a Phillips curve relationship would suggest that lower unemployment is correlated with greater wage inflation, the lack of commensurate increase in the cost-of-labor response reflects the breakdown of this relationship,” the report states.

Morningstar further notes that, while taxation and regulation have become less of an issue under the Trump administration, these issues are still cited as the single biggest problem by nearly a third of small businesses. 

Green shoots in the U.S. housing market? The second quarter saw the National Association of Realtors’ Housing Affordability Index realize its first year-on-year gain in two years, due to lower mortgage rates and an easing in the rise of house prices, Morningstar further reports. The firm notes that, while existing home sales are still declining, the pace of decline has slowed – and this data together suggests the U.S. housing market is “slowly but steadily improving.”   

Futures imply downturn in federal-funds rate. Morningstar further observes that, while futures markets historically have represented the forecasted path of the federal-funds rate as the Fed manages monetary policy, this expected path has been a poor guide to the actual trajectory of the federal-funds rate around inflection points where the Fed altered monetary policy.  

As highlighted in the report, Morningstar emphasizes that the most recent market-implied path for interest rates has “taken a turn and starkly contrasts previous expectations for 2020-22.” 

Equity-market volatility. Meanwhile, the Equity Market Volatility Indices show that markets have been less reactive over the past year than levels seen in both 2011-12 and 2015-16. The report notes that volatility in the U.S. and Hong Kong remain elevated relative to their lows, while European volatility has declined. 

Passive-friendly categories see higher growth. Fund categories with a large positive difference in their funds’ average Morningstar Quantitative Rating (active MQR score minus passive MQR score) is seen as more favorable for active management than those with a large negative difference, which is seen as favorable to passive management, the report explains.   

In reviewing how these rates stack up for the top categories of each management style, the report shows that active-friendly categories tend to have negative organic growth rates, as opposed to positive rates for passive-friendly ones, reflecting a significant difference in investor asset flows.