Well the first six months of 2018 were very different from 2017. Volatility is back, sometimes with a vengeance.
Stocks, as measured by the S&P 500, gained 1.64% year-to-date. Interest rates, as measured by the US 10-year Treasury, stand at 2.85%, up from 2.40% at the start of the year. While these changes are not significant, the road both stocks and bonds traveled was quite hilly. Stocks opened the year going up 7% before falling over 10%, recovering, and then trading in a narrow range for the last couple of months. Interest rates were on a steady climb peaking at 3.11% in mid-May, before sliding down into the end of June.
The most recent and biggest issue facing the financial markets right now is the issue of trade. Investors fear that the Trump administration’s proposed tariffs could lead to retaliatory measures from trading partners around the world, which in turn could foster a global recession. I remain hopeful that this is just a negotiating tactic, and that it will not escalate into an all-out trade war, which will have no winner.
Barring such an outcome, I believe that the current business cycle has at least another year or two left to run. The major signs that would signal the beginning of the next recession are not currently in place. Unemployment is low and likely to decline further; wages are rising, but not sharply; the Federal Reserve is tightening, but real interest rates are still quite low; inflation is moving higher slowly; the yield curve is not inverted; corporate profits are increasing; and the leading indicators are still rising. Until some of these indicators change, recession is not likely. The charts below highlight this outlook.
Global economic cycle, Q2 2018 Leading Economic Indicators (12-month change) June 1988 – May 2018
On the investment front, I feel small cap stocks may do better than larger companies, as most of their business is domestic and therefore somewhat insulated from trade tariffs. Value stocks (large dividend paying companies), which have lagged growth stocks (think Amazon) are starting to signs of improvement. While international stocks look like a better value than US stocks, I think the US will outperform international for the rest of the year. I believe stocks will end the year higher than where they are now, and that stocks will do better than bonds for the balance of 2018. We continue to maintain a diversified approach to your portfolio with slight adjustments to reflect the above outlook.
Feel free to call me if you have any questions or concerns.
July Calendar of Events (comments and additions for future months are always welcome)
- July is National Picnic and National Parks month – why not go to a national park and have a picnic – a 2 for 1
July 1st Bureau of Internal Revenue (the IRS) founded in 1862– betcha nobody celebrates this birthday
July 4th Independence Day
July 11th My daughter Ryan’s birthday
July 18th National Hot Dog Day
July 29th National Lasagna Day
July 30th International Friendship Day is a day designed to foster friendships and bridge the gaps between race, color, religion
P.S. Thank you for your referrals. They are making a big difference in my practice. Feel free to share my name with your friends on Facebook or LinkedIn.
Sources: Nationwide Financial, Blackstone, Envestnet
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