Market Update 6.30.2018
The U.S. stock market got back on track in the second quarter, increasing 3.71% for the quarter, however returns for the major benchmarks varied considerably. The market is up 3.08% year to date.
The market started the quarter off with a fairly significant drop, but performed solidly throughout the quarter, driven by very good corporate earnings which are the still benefiting from the corporate tax cuts and outweighing the negative impact of the news on trade tariffs.
The economy continues to grow at an accelerated rate. Estimates for GDP growth in the second quarter are above 4% which would be the highest growth rate in a long time.
Unemployment is at an all-time low. This causes wages to increase and the data shows wages are finally starting to increase after being flat for over ten years. Higher wages drive inflation, so inflation is also starting to increase. Higher inflation causes the Fed to raise interest rates. Higher interest rates hurt the stock market. Because why invest in stocks if you can earn a good rate of return from a bond?
The Fed raised interest rates, as expected, by another 0.25%. The Fed is still expected to raise rates two more times this year. While the Fed raising rates too fast is a fear that is much discussed in the media, the current Head of the Fed is unlikely to increase rates too fast. It is not in his background.
Interest rates continued to tick higher, but a slower rate, while remaining historically low. The yield curve flattened, which is normally a predictor of an upcoming recession. It is not at this time because interest rates have been held so low for a long time.
The housing was market was mixed, with flat sales and increasing prices.
The global economy continues to grow, but at a slower pace. China has slowed and their government has undertaken actions to stimulate growth. Growth in the EU has been good, but appears to be slowing and they face issues with several members.
Just a word on the “trade wars” – one of the media’s favorite discussions is tariffs. Pundits speak of the economic damage that has been done by tariffs in the past, which is correct. But the market seems to viewing President Trump’s tariffs and threats of tariffs as a bargaining tool. Based on the agreement the U.S. reached with the EU this week, that appears to be correct because both sides have agreed to stop with new tariffs and have agreed to review their current trade agreements. Also, China would suffer much greater economic and social damage from a full blown trade war than the U.S. You just have to look at the amount of goods we buy from them. Their economy is already slowing. Tariffs would significantly slow their economy. It appears to me, based on the how the market is reacting, tariffs and the threat of tariffs are a negotiating tactic. And they won’t be in place for an extended period of time. Only time will tell, but I think it’s prudent to give these tactics some time to work.
The outlook for the market is positive. The economy is growing and corporate earnings are high. Actually the economy is growing at an accelerated rate when historically growth slows, so we are not experiencing the traditional summer. A lot of investors are concerned that the market has been doing well for so long that a downturn is in order, but there are no signs to indicate a downturn is coming. However, when investors feel like the market is due for a correction, a small drop can turn into a bigger event because of investor sentiment.
As always, please contact me if you have any questions or concerns.