A strong economy, low unemployment, and corporate tax cuts should support rising domestic stock prices in the first half of this year. Unfortunately, the markets remained relatively flat. There is one main explanation holding back the stock market: A looming trade war. So the question remains, will Washington get out of the way?
2018: The First Half
Strong employment, solid GDP growth, robust corporate earnings, and tax reform should support rising domestic stock prices. Despite these positive economic indicators, the stock market remained relatively flat through the end of June. Stocks rose in a straight line from November of 2016 through February of this year when the U.S. markets pulled back to correction territory. In brief, stocks rose too far, too fast and simply needed a cooling off period the beginning of this year. After this quick cooling off, stocks gained momentum through the second quarter. Unfortunately, the threat of a trade war dampened the momentum producing only a slightly positive year-to-date return.
Following the trend for the last several years, international economies showed some growth, but international stock returns lagged domestic stock returns the first part of the year. This resulted in a slightly negative return for international stocks the first two quarters of the year.
As we begin a rising interest rate environment, bond prices have dropped through the first two quarter of the year while commodities have finally showed signs of significantly positive returns.
2018: A Look Ahead
As we head into the second half of 2018, investors are facing some important questions. How long will the economy continue to expand? Will a trade war materialize stunting equity growth? How will rising interest rates impact my portfolio?
It is important to recognize the long-running global economic expansion and the aging stock bull market. Old doesn’t necessarily mean done. Investors may be rewarded by maintaining risk-on positions and not being overly defensive at this stage of the market cycle.
With the strong economy, low unemployment, and corporate tax cuts supporting the potential for a great second half of the year for U.S. Stocks, there is one foreseeable hurdle: A potential trade war.
As interest rates are anticipated to continue to rise through the end of the year, fixed income will continue to struggle. Shortening up the duration of bond funds will mitigate losses as we continue to look for opportunities. Unfortunately, fixed interest products, such as CD’s, are still not producing attractive returns.
International equities still offer a good value while commodities show potential as long as oil prices remain steady.
Overall, the U.S. economy is strong heading into the second half, but may be derailed by a trade war. International stocks have solid value with strong corporate earnings which provide the potential for a solid recovery through the end of the year. While new Fed Chairman Jerome Powell continues to normalize the Fed Funds rate and interest rates rise, bond prices may continue to fall. We expect portfolios to continue with solid positive returns through the end of this year. For our clients, we will continue to implement a “Core and Explore” asset management strategy using core asset classes with alternative investments to provide a truly diversified portfolio.