Quarterly Market Review: Second Quarter 2019 - T. Rowe Price

Second Quarter 2019

QUARTERLY MARKET REVIEW

U.S. Stocks International Stocks Fixed Income Markets Global Capital Markets

Environment Emerging Markets

Stocks U.S. Municipal Markets

QUARTERLY MARKET REVIEW

U.S. Stocks

Second Quarter 2019

S tocks overcame a sharp pullback in May and recorded solid gains in the second quarter. The largecap S&P 500 Index reached record highs and ended with its best start to the year in over two decades. Except for energy stocks, all sectors in the S&P 500 recorded gains, led by financials shares, which gained 8% on a total return (including dividends) basis. Materials stocks also performed well, while a rise in Microsoft shares helped drive strong gains in information technology stocks and propelled the company past USD 1 trillion in market capitalization--a threshold previously matched only briefly by Apple and . The quarter was also notable for Uber's initial public offering, one of the 10 largest in history and the biggest since Chinese internet giant Alibaba Group's debut in 2014.

Waxing And Waning Trade Hopes Drive Sentiment

The rise, fall, and resurgence of hopes for a resolution to the trade dispute between the U.S. and China seemed to play a large role in driving sentiment during the quarter. In early April, President Donald Trump announced that the U.S. and China were nearing an "epic" trade deal. Highlevel talks continued over the next few weeks, and President Trump stated near the end of the month that Chinese President Xi Jinping would soon visit Washington, presumably to sign an agreement.

Hopes for a deal were dashed in early May, however, sending stocks sharply lower. With negotiations at a standstill, on Friday, May 10, the White House increased the tariff rate from 10% to 25%

on USD 200 billion in Chinese goods. (The U.S. had previously imposed tariffs at the higher rate on USD 50 billion in Chinese products deemed strategically important.) The S&P 500 experienced its secondworst day of the year the following Monday, after China's announcement over the weekend that it was imposing retaliatory tariffs on an additional USD 60 billion in U.S. imports. Companies with significant exposure to China were hit particularly hard, with Apple falling nearly 6% as investors worried both about iPhone sales in China and rising costs for components made in the country.

Further Tariff Hikes Averted, At Least For Now

U.S. trade policy took an unexpected turn on May 30, when the president

Total Returns

Dow Jones Industrial Average S&P 500 Index Nasdaq Composite Index S&P MidCap 400 Index Russell 2000 Index

2Q 2019 3.21% 4.30 3.58 3.05 2.10

YeartoDate 15.40% 18.54 20.66 17.97 16.98

Past performance is not a reliable indicator of future performance. Note: Returns are for the periods ended June 30, 2019. The returns include dividends based on data compiled by T. Rowe Price, except for the Nasdaq Composite, whose return is principal only. Sources: Standard & Poor's, LSE Group. See Additional Disclosures.

announced in a tweet that the U.S. would impose a 5% tariff on Mexican goods unless the Mexican government stopped the flow of unauthorized migrants across the border. A later presidential statement added that the tariff would gradually increase to 25% "if the crisis persists." Stock futures fell sharply in response, with automakers among the worst hit given the importance of crossborder supply chains in the industry.

Trade tensions eased again in June, supporting sentiment. President Trump announced early in the month that the Mexican tariffs would be suspended following new security pledges from the Mexican government. The president also seemed to give a boost to markets on June 18, when he promised "an extended meeting" with Chinese President Xi Jinping at the G20 summit at the end of the month. Investors further welcomed Treasury Secretary Steven Mnuchin's remark that negotiators were "90% of the way there" in reaching a deal. Markets were closed on the final weekend of the quarter, when President Trump announced that the two sides had resumed negotiations and arranged a truce that would prevent the imposition of new tariffs.

Worsening Economic Signals Raise Hopes For Dovish Fed Turn

While trade signals fluctuated, economic data generally worsened throughout the quarter. In early April, markets surged following reassuring reports on manufacturing activity in both the U.S. and China. Investors also reacted positively to strong jobs and retail sales data. Durable goods orders fell back sharply in the first two months of the quarter, however, and IHS Markit's composite survey of both U.S. manufacturing and service sector activity in June indicated the weakest growth in overall business activity in three years. May payroll increases fell far short of expectations, and consumers appeared to be growing less optimistic despite healthy wage gains--the Conference Board's survey of June consumer confidence hit its lowest level in two years due to "a less favorable assessment of business and labor market conditions."

Expectations that the Fed would respond to the slowdown by cutting interest rates seemed to be the primary factor in June's market rebound. The S&P 500 Index recorded its secondbest day of the year on June 4, following

a pledge from Fed Chair Jerome Powell that policymakers were paying close attention to the impact of trade tensions on the economy and would "act as appropriate to sustain the expansion." Investors were further encouraged by the Fed's statement following its June 18?19 policy meeting. Policymakers removed previous references to being "patient" in making policy adjustments, raising hopes that they would act aggressively to counter any downturn.

Trade Progress Is Key For Markets In The Second Half Of The Year

Positive economic growth, low inflation, and accommodative monetary policies are likely to support financial asset prices in the second half of 2019, although much depends on a resolution of the U.SChina trade dispute. While the consensus earnings forecast is for a reacceleration in corporate earnings growth later in the year, this will depend on improving economic conditions, particularly outside the U.S. However, the global economic outlook remains subdued as most developed economies are growing below their potential and trade tensions are corroding business confidence and capital spending.

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QUARTERLY MARKET REVIEW: U.S. STOCKS

QUARTERLY MARKET REVIEW

International Stocks

Second Quarter 2019

Developed nonU.S. equity markets posted solid secondquarter gains as the Federal Reserve (Fed) and European Central Bank (ECB) signaled they

would take measures to combat slowing economic growth and address the risks associated with ongoing trade tensions between the U.S. and China.

Within the MSCI EAFE Index, which tracks developed markets in Europe, Australasia, and the Far East, every sector except real estate advanced, led by gains in information technology, consumer discretionary, and industrials. Growth stocks in the EAFE index rose 5.96%, outperforming value shares, which returned 1.89%.

European Stocks Rise On Hopes Of Easier Monetary Policy

The MSCI Europe Index rose almost 5%, buoyed in part by assurances by ECB President Mario Draghi that the bank could offer more stimulus measures as early as July if growth continued to stall. His comments and similar promises by the Fed drew risktolerant investors back to markets. German and French markets gained approximately 7%, as measured by their respective MSCI indexes. UK stocks, pressured by ongoing Brexit uncertainty, rose less than 1%.

European Growth Subdued And Under Pressure Of Trade Woes

Myriad uncertainties contributed to volatility throughout the quarter. Trade

tensions and a slowing global economy have taken a toll on European growth and sentiment. Germany's Bundesbank cut its latest 2019 economic growth forecast to 0.6% from 1.6% in December and warned that "lackluster exports" have hurt Germany's exportheavy economy. The most recent data showed German imports, exports, and industrial production fell much more than expected--imports sank 1.3%, exports slumped 3.7%, and industrial production declined 1.9%. Throughout Europe, growth has been driven by the services sector, which reflects the relative strength of consumer demand and improving labor markets. However, business optimism about the future has fallen and is at its lowest level since 2014.

Total Returns

MSCI Indexes EAFE (Europe, Australasia, Far East) All Country World exUSA Europe Japan All Country Asia exJapan EM (Emerging Markets)

2Q 2019 3.97% 3.22 4.91 1.05 0.56 0.74

YeartoDate 14.49% 13.99 16.45 7.97 10.83 10.76

Past performance is not a reliable indicator of future performance. All data are in U.S. dollars and represent gross returns, as of June 30, 2019. This chart is shown for illustrative purposes only and does not represent the performance of any specific security. Investors cannot invest in an index. Source: MSCI. See Additional Disclosures.

UK's Boris Johnson Expected To Be Next PM

Unable to secure a Brexit deal, British Prime Minister Theresa May resigned June 7, leaving her yettobedetermined successor to get parliamentary approval for a Brexit plan. After several rounds of voting, former Foreign Secretary Boris Johnson seems to be the favorite and is expected to win versus current Foreign Secretary Jeremy Hunt in a partywide vote at the end of July. Johnson has pledged to uphold the October 31 deadline that the European Union in April gave the UK to finalize a Brexit agreement. Johnson's victory would increase the chance of a nodeal Brexit and increase pressure on the British pound, the UK economy, and businesses in the short term as investors brace for a hard Brexit, said T. Rowe Price Fixed Income Portfolio Manager Quentin Fitzsimmons. While the Bank of England held rates steady at its June meeting, Governor Mark Carney indicated that the bank would provide stimulus to offset economic weakness in the event of a nodeal Brexit. Carney has said he believes a nodeal Brexit would be a significant shock to demand and would not resolve the uncertainty that is hanging over business decisions and investment.

Japanese Equity Gains Capped By Trade Tensions

Japanese stocks rose but underperformed other developed markets as the U.S.China trade war hit the tradedependent economy. In its latest report, the Ministry of Finance reported that Japanese exports fell

for a sixth consecutive month in May, suffering from a sharp decline in chipmaking equipment, which fell by almost 28%. Business confidence among manufacturers dropped to a two-and-a-half-year low in June, which, combined with weak exports and household demand, is sparking concerns that the economy will fall into recession. At its most recent meeting, the Bank of Japan left interest rates unchanged but joined the Fed and ECB in signaling its readiness to increase stimulus if needed.

Emerging Markets Rally Amid RiskOn Revival

Emerging markets stocks rose in the second quarter as investors returned to riskier assets as trade tensions between the U.S. and China eased and global central banks promised monetary stimulus. Emerging Europe and Eastern Europe markets both gained more than 12%, boosted by a 17% gain in Russian shares. Latin American stocks rose nearly 5%, thanks in no small part to a 32% rally in Argentine stocks. In May, MSCI announced that it would include Argentina in its emerging markets index, which has the potential to draw billions of dollars into the market.

The MSCI EM Europe, Middle East and Africa Index rose 8.11%, also propelled higher by Russia's gains. Turkish stocks rose 3%, buoyed late in the period by the defeat of Turkish President Recep Tayyip Erdogan's candidate in Istanbul's mayoral repeat election. The defeat ended the 25year dominance of Erdogan and his party in the city. T. Rowe Price Sovereign

Analyst Peter Botoucharov said the opposition party's victory is a longterm positive. It is the first sign of potential political rebalancing after years of singleparty rule. However, the transition could cause volatility.

Outlook: Global Growth Expected To Moderate But Bottom May Be In Sight

We expect global growth to moderate against the backdrop of ongoing trade tensions, slowing Chinese demand, and geopolitical disrupters, including policy uncertainty in Italy, as well as uncertain Brexit negotiations. Trade-driven economies, including Germany, may be the hardest hit going forward. U.S.-China trade tensions at the beginning of the year have likely exacerbated this slowdown, but the improved sentiment at the Group of 20 meeting will likely support a rebound in confidence. Even so, the trade tensions have had an impact on global growth, which will likely prompt the ECB and the Fed to ease policy within the next quarter or two. Chinese monetary and fiscal stimulus have the greatest potential to drive global growth higher. Lower oil prices should give growth a boost among oil importers, including Europe, China, and India. While some of the political risks that had hung over emerging markets countries, have eased, myriad geopolitical and trade issues remain that could spark risk-related selling and derail markets. Other challenges to the outlook for global equities include the rising popularity of anti-establishment and populist political parties.

Additional Disclosures MSCI and its affiliates and third party sources and providers (collectively, "MSCI") makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

QUARTERLY MARKET REVIEW: INTERNATIONAL STOCKS

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