Update on the Markets:
| Index | 2nd Quarter 2018 | Year-to-Date |
| S & P 500 (Large US Stocks) | 3.43% | 2.65% |
| Russell 2000 (Small US Stocks) | 7.75% | 7.66% |
| FTSE All World ex US (International Stocks) | (2.54%) | (3.65%) |
| Barclays US Aggregate (Bonds) | (0.16%) | (1.62%) |
July 2018
The Halftime Report
We started the year very strong. Everything looked good: worldwide economic growth, benign inflation, earnings, employment, etc. Then in early February, we hit an air pocket. The economy shifted into a lower gear – as is often the case in the first quarter. Economic growth and hiring slowed. Investors wondered whether earnings had peaked. At one point Stocks fell 10% and finished the quarter in the red. But since April, conditions have reversed. The labor market has strengthened considerably. With the improved hiring, consumers are more confident and spending. Businesses are also more optimistic about their future and investing in their operations. Government spending is helping too. Second quarter growth will be much higher. Stocks have gone up.
While this is all a nice set-up for the rest of the year, there are still plenty of things to worry about. Only US stocks seem to have escaped these concerns – international stocks are still in negative territory. The list includes a spike in inflation, an aggressive Fed, slowing global growth, and stress in Europe. The biggest worry right now is the prospect of a global trade war. President Trump and our biggest trading partners are playing a game of chicken – slapping ever-higher tariffs on more of each other’s exports. Who will blink first? Presently, most investors believe this is all part of a negotiating tactic that will lead, hopefully, to trade on more favorable terms.
One More for the Fed
Ever since the Great Recession, stocks and bonds and almost all other assets have been supported by extremely low rates by the world’s central banks. Recently the US Federal Reserve has become less accommodating – slowly raising rates and shrinking its balance sheet. Despite several rounds of tightening, rates are still historically very low and continue to offer support. Any change in the pace of rate increases will dramatically affect the financial markets. The market expected the Fed to raise rates three times this year, but the latest inflation readings and labor market reports have probably led the Fed to change its mind. Now four hikes are more likely. Stocks can absorb higher rates if they are gradual and expected. Heck, higher rates are due to a stronger economy – a good thing for stocks! But investors are on the lookout for any signs that the Fed may begin to panic about higher inflation and raise rates too quickly – squelching the recovery. A jumpy Fed is just one more worry for the market.
Big Picture
Many things are going right for the economy, especially the labor market, and stocks usually follow the economy. The tight labor market will lead to higher wages and a more confident consumer. An additional boost to corporate earnings is the tax cut. The government is also helping by spending more. As always there are things to worry about. While workers reap higher pay and benefits, rising labor costs could spur the Federal Reserve to raise rates more aggressively. A full-out tariff war would be disastrous, and mid-term elections are only four months away. The middle of the year may be rocky. On balance, stocks remain attractive and should outperform bonds. Maintain your neutral asset allocation, looking to add to stocks on dips this summer.
As always, please let me know if you have any questions or comments.
Sincerely,
Henry Gorecki, CFP®
