The second quarter of 2018 has been eventful. Stock and bond markets digested a large amount of economic, corporate, and geopolitical news and emerged thus far on the positive side of the ledger. Stock markets flirted with 2018 lows in the first days of the quarter. Markets ended the quarter mixed as positive earnings reports and promising geopolitical developments were partially drowned out by escalating rhetoric surrounding trade—most notably NAFTA and trade deficits with China. The S&P 500 managed to record a small gain, up 3.43% for the second quarter. International markets fell slightly, losing 0.89% for the quarter. Year to date results tell a similar story. Domestic markets as measured by the S&P 500 gained 2.65% while international markets as measured by MSCI EAFE lost 2.40%.
Interest rates continued to rise during the quarter. The ten-year Treasury yield topped 3% for the first time since December 2013. The benchmark yield peaked at 3.11% on May 17 before falling back to 285% at quarter end. Short-term rates inched higher following the second rate increase from the Federal Reserve Open Market Committee this year. Markets expect at least one more rate increase in 2018.
Markets will focus on outcomes from the U.S./North Korea summit and what they mean for regional stability in Asia. Corporate earnings should continue to improve domestically and internationally as economies continue to expand globally. Risks surrounding tariffs announced by the U.S. and any retaliation from our trading partners will also be in focus. Many believe the Trump administration’s tariff threats were made for the purpose of establishing a bargaining position as trade deals are renegotiated. Markets will watch closely that negotiations do not escalate into a trade war, which will not benefit any of the parties involved and could potentially impact earnings. Uncertainty surrounding trade will likely keep volatility elevated over the next several quarters.
We still believe stocks should perform better than bonds in the intermediate-term, and we continue to maintain a slight overweight position towards risk assets. Stocks represent the best opportunity to build wealth over the long-term, and inflation—not market volatility—is the key long-term risk to achieving investment goals.
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