Review
The second quarter of 2018 was significantly more volatile than we have seen during the almost 10 year bull market we are currently experiencing. Markets seemed to move on a daily basis depending on the rhetoric surrounding the tariff situation between the US and the rest of the world. In an attempt to avoid volatility due to the trade disputes, investors found some safety in small cap stocks since earnings of large cap multi-nationals could be affected if there is an extended dispute. Fixed income experienced another rough quarter as interest rate rises have a negative effect on bond prices in general.
On the economic front, data for the quarter was positive as employment numbers were solid and inflation was contained. We currently see no warning signs from leading economic indicators that suggest recessionary conditions are on the horizon.
Corporate earnings were strong with S&P 500 companies reporting a greater than 20% increase in earnings from the prior year. The increase was due in part to a near 10% increase in revenue, with the rest due to the new tax regulations.
Outlook
For the current quarter and rest of the year, trade disputes will most likely dictate the direction of the markets. A quick and reasonable resolution, especially with China, should allow the positive environment for stocks to continue as earnings will likely continue to be strong. Even with a fourth rate hike by the US Federal Reserve expected this year, inflation is expected to remain contained enough as to not pose any headwinds for companies.
Equities
We are shifting our stance that international sectors will outperform the US in the near term. Economic conditions domestically and the positives from the new tax laws should allow US markets to fare better than their international counterparts. Although both should be positive without the lingering effects of trade disputes. Small caps may continue to outperform until trade agreements are in place.
Fixed Income
We maintain our stance on the potential for increasing interest rates in the US. It is prudent to be on the shorter side of duration, while seeking opportunities for yield in areas outside of treasury bonds or with higher yielding debt.
Alternatives
With economies around the world growing and our primary concern being inflation, we believe that the addition of commodities to our portfolios will provide opportunities for return and a hedge against inflation.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering any market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com
Website: www.vcm-wealth.com
Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
