Stocks hit new records in June, as did gold, but investors fear a correction

• All stock markets are performing well in June, with the S&P500 even hitting a new record
• Government debt is also performing well, the price of gold is seeing a very large increase
• However, investors are wary because the previous two major corrections in stocks followed similar levels of growth.
• Analysts expect the Federal Reserve to cut interest rates this month

The second quarter of 2019 was quite volatile for financial markets. In April, stock market indices recorded growth, in May a serious decline, and in June, quite the opposite – very serious growth. The S&P500 rose by nearly 7% for the month, after falling by about 6% in the previous one, and managed to reach a new historical record. The dynamics were similar in European markets – DAX in Germany rose by over 5%, and FTSE in the UK by 3.4%. As you can see, the most notable growth is in the US market. According to analysts, it is mainly due to the apparent breakthrough in trade negotiations between the US and China. However, we remind you that there were such "breakthroughs" before, and then the tone between the two economic giants deteriorated again.

Interestingly, while stocks were performing strongly, gold prices were also performing well, up over 6%. Treasury debt also continued to generate some returns – close to 1% for long-term US Treasurys and 0.21% for short-term ones. In this context, our Virtual Pension Fund investment in the "Permanent Portfolio" performed as expected, generating a 4.06% return for the month – the highest ever. The average return on Universal Pension Funds also improved, reaching 1.19% in June – also the highest since we launched the Virtual Pension Fund in May 2018.

Investors and analysts, however, are casting a wary eye over the recent record highs reached by the S&P500. This is because the last two times the index hit a new record, it was almost immediately followed by a sharp correction. Some fear that this is exactly what could happen now in the foreseeable future in July or August. Investors in general are currently preparing for a recession. A recent survey of the attitudes of investment fund managers shows that expectations of a recession in the near future are at their highest level in 4 years. In this context, investors have increased their purchases of government debt, which has led to the interesting combination of extremely high growth in equity markets in parallel with weak, but still decent growth in debt markets in recent weeks.

There has also been a significant exodus of investors from actively managed funds to passively managed ones. The market share of actively managed funds has been severely squeezed by disappointing results and high fees, while at the same time they are increasingly failing to outperform market indices. Because of this, and also because of expectations of a recession, more and more investors are transferring their capital to passively managed funds. Passively managed funds guarantee the closest possible return to that of the indices they track, making them a particularly popular choice in conditions of increasing economic uncertainty and fears of an impending recession.

The big jump in the price of gold is due to a record influx of capital into gold exchange-traded funds in the last few years. According to data from the World Gold Council, at the global level, capital in gold exchange-traded funds has increased by 5%. In some funds, the growth has even been at double-digit rates. Now that both major central banks in the West (the Fed in the US and the ECB in Europe) are talking about a potential interest rate cut, it is very likely that the price of gold will continue to grow. It is unlikely to grow at the same pace as it rose in June, but it will most likely continue to grow in the next few months until the fall.

The most likely reason for this rush of capital into gold is the words of the chairman of the US Federal Reserve, who at the last meeting of the central bank's board in June said that a cut in interest rates is being considered. Wall Street traders currently seem confident that the Federal Reserve will cut interest rates in July. A number of factors have accumulated in recent months that have pressured the US central bank to make this decision.

The trade war with China, the slowdown in inflation and economic growth, and last but not least, the constant pressure from President Trump himself, seemed to be enough to bend the will of Jerome Powell, the chairman of the central bank. The irony is that Powell originally had the image of a "conservative" central banker, who was not very likely to decide to cut interest rates easily, or at least that was the impression created in the media. However, it is evident that, like the ECB, the Fed has already become seriously worried about economic growth rates and the risk of a recession in the near future.

It remains to be seen whether, after the now seemingly certain interest rate cut, the two central banks will be able to prevent a recession. In our opinion, it is unlikely, but they will certainly unnecessarily pour even more cheap credit into the financial system, which will lead to unprofitable investments.

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