2Q Newsletter Commentary

US markets finished the second quarter up nearly 4%, besting our international brethren in developed economies by nearly 5%, and performing far better than economies in the emerging markets space who, on average, lost about 8% of their value in the quarter.  This despite the “sky is falling” mantra chanted consistently- if incorrectly- the past three or four years by the “experts” on Wall Street, and creating worry among those up and down Main Street.  As I’ve stated in previous editions of this newsletter, while there will be someone correctly warning of the next market crash, it’s only because when thousands of people make predictions, inevitably one of them will be right.  Even a broken clock is right twice a day!  Perhaps more apropos, someone will win the lottery too, but it’s not likely to be you!

Here are the key themes from the 2nd Quarter:

Rising Oil Prices

Oil prices bounced back in June after slipping in May, ending the month at $74.15/barrel, a 10.61% increase from the May closing price of $67.04. For the year, oil is up 22.72% after closing 2017 at $60.42.  Simple supply and demand economics saw oil prices rise in June as the supply of domestic crude dropped by almost 10 million barrels in the third week in June, according to the U.S. Energy Information Administration Oil prices have been rising due to increasing global demand and as a response to sanctions on sales of Iranian oil.

Economy

U.S. GDP came in at a 2.0% annualized rate for the first quarter of 2018.  Despite being slightly below expectations, the economy is now in its 9th year of expansion, the 3rd longest on record. The jobs market stayed strong and the current unemployment rate has fallen to 3.8%.  Both of these indicators pointing to continued growth.

The Fed

In March, the Fed raised the federal funds rate target by 25 basis points to a range of 1.50% – 1.75%. Then in June, the Fed again raised the federal funds rate target by 25 basis points, to a range of 1.75% – 2.00%. Market expectations are that the Fed will likely deliver 1 or 2 additional increases before 2018 comes to a close.

Tax Cuts

Corporate cash remains plentiful and more is being repatriated, as told by the Bureau of Economic Analysis report highlighting that $308 billion was repatriated, which led to a record $189.1 billion in stock buybacks.

Yield Curve

Interestingly, the yield curve has historically been a good indicator of a coming recession when it inverts – the shorter end moving above the longer end. But as of the mid-way point, most economists believe that the Fed won’t do anything to push the yield curve to invert. But the curve does seem to be flattening, pointing toward financial conditions and global liquidity tightening overall. Clearly, both would have implications for the markets around the globe and are worth keeping an eye on.

Tariffs

President Trump’s proposed tariffs on $34 billion worth of imports from China went into effect at the end of the second quarter. China predictably responded with tariffs of its own, targeting U.S. imports including soybeans, aircraft and autos. No one will debate that trade worries weighed on the markets and the markets outside the United States were generally most affected, especially in China and emerging markets. But European equities were also affected, with auto companies suffering on fears that US tariffs could be applied to car imports. Glass-half-full economists are quick to point out that the $34 billion represents less than two-tenths of 1% of U.S. GDP – and if you add the additional $200 billion that President Trump is considering, it still is only about 1% of GDP.  Glass-half-empty economists, however, suggest that any trade war between the world’s two largest economies would have significant negative effects on global growth as well as inflation here in the U.S. and most certainly stop the current bull market dead in its tracks.  The answer is probably somewhere in the middle.

Can the First Half Predict the Second Half? The short answer is no. But, Since 1950, when the S&P 500 was positive at the mid-way point, the market was higher for the entire year 94% of the time.