Quarterly Commentary – June 2018

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The U.S. Equity markets started a slow ascent after getting close to the lows of the year as we approached the end of March. April started on a good note and the past quarter turned out to be positive. Year to date however the results have been mixed and muted for U.S. equities overall. The following are performance numbers from various popular indexes. Please remember index numbers are not individually comparable to a properly diversified portfolio. Each portfolio may include an allocation to securities similar to these indexes in varying amounts based on your personal risk tolerance and should only be compared in that context. The S&P 500 was up 2.6% for 2018. The Dow Jones Industrial Average was down 0.7%. The Nasdaq Composite Index was up 8.8%. The Russell 2000 Index was up 7.7%. International equities as represented by the MSCI World Ex U.S. Index were down 2.8%. Fixed Income as represented by the Barclays Aggregate Bond Index ended down 1.6% for the year.

The positive economic conditions that have helped markets during the past year are still very much in force, however a variety of concerns are still weighing on investors. Some of the concerns still carry over from earlier this year particularly regarding the upward direction of interest rates, the expected pace of rate increases and the continued progression toward trade confrontations. These could potentially impact economic growth which appears to still be accelerating. The Federal Reserve reiterated however that it has no intent to derail growth. As it stands, forecasts for second quarter growth have been trending higher and reflect very healthy projections for Gross Domestic Product. Both business and consumer are reflecting strong confidence levels and both retail and capital spending have been on the rise. With unemployment already low at around 4%, the timing of today’s fiscal stimulus occurring during a period of limited slack in labor markets is historically unusual. That can bring some uncertainty, particularly as it relates to inflationary pressures. With a flattening yield curve however, the debt markets do not seem very preoccupied with inflation.

Ongoing trade disputes are going to add to near-term volatility. Trade wars are not good for anyone and can become a slippery slope with tit for tat scenarios potentially playing out and getting out of hand, particularly if pride overcomes rational thinking. Opportunities for constructive outcomes are still a possibility. It appears that we are at the stage of trying to gain leverage through rhetoric, which may be akin to playing with fire. The posturing hopefully represents a calculated risk on the part of the administration in trying to reverse a less than favorable situation for the U.S. that has gone on for a very long time, particularly as it relates to dealing with China. Regarding China, one could argue that we have been in a trade dispute for a long time in part from their one-sided unfair practices and the theft of intellectual property. Whether it makes sense to impose tariffs on some of our closest partners at the same time we deal with China is open for debate, but this is not like many of these countries don’t have tariffs already. The objective is about re-negotiating these complex agreements and lowering them ultimately. At the end of the day, we don’t know what is happening behind closed doors. Tariffs or threats of such may have been necessary to bring certain countries to the negotiating table. We have leverage through a large and vibrant economy with a strong consumer. We also have an unsurpassed wealth of intellectual capital that needs to be safeguarded. The fiscal stimulus and expected growth in the U.S. overshadows the foreseen impact from the trade dispute to the extent that it doesn’t get out of hand, so this appears well timed. Another dimension will be the direction of further restrictions from foreign investments into the U.S. Unless we see a significant erosion in business confidence causing companies to avoid making capital investments, we are optimistic that the U.S. will exert enough leverage to achieve a positive outcome. There might however be some losers and some industries may bear the brunt of these policies. The trade concerns didn’t seem to extend to the Federal Reserve as they again raised rates and did not express much concern that the disputes would impact U.S. growth in a material way. There will be a lot of political noise both here and abroad surrounding this issue which will most likely continue to cause added volatility.

U.S. companies are expected to reflect the second highest year-over-year earnings growth and highest revenue growth since 2011. We are not immune to a correction at this juncture, or certainly some stagnation until we have more clarity regarding some of the concerns raised.

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