The quarter was marked by a continued rally in the U.S. Dollar sparked by strong U.S. growth and economic data, much to the detriment of emerging market stocks and commodities (with oil being the only exception). The quarter was roiled by tariff posturing, most notably between the United States and China. Although President Trump softened his trade stance in recent days, the projected tariffs are still due to take effect as soon as July 6th. Needless to say there is still a fair amount of angst and a high level of uncertainty associated with the lack of resolution, even at this late date.
Volatility in our equity markets was in effect throughout the second quarter. By way of example, the Dow Jones Industrial Average rallied 8 straight days in May but also declined in June another 8 straight days. U.S. equities still managed positive performance during the quarter with the Dow Jones squeezing out a 1.26% gain and the broader S&P 500 Index returning 3.43%. Leading sectors were U.S. small cap companies and large cap technologies. For example, the Russell 2000 advanced by 7.75%. These smaller companies had the advantage of receiving more of their revenue from within the U.S. compared with larger companies that are often multinational whose revenue from overseas was negatively affected by the stronger dollar. As stated, tech stocks also continued to perform well as the NASDAQ composite advanced by 6.61%. International developed markets declined modestly by 1.24%. Emerging market equites were the worst performing equity sector, declining by 7.96%.
Bond and Credit Markets
On June 13th the Federal Reserve raised its benchmark Federal Funds Rate 25 basis points to the range of 1.75% to 2.00%, marking the seventh time since the financial crisis that it has raised its key rate. A more hawkish Federal Reserve also reiterated its targeted forecast of two more rate hikes for later this year. The Fed additionally noted that inflation has finally reached its 2% targeted level. The 10-year U.S. Treasury ended the quarter with a yield of 2.84%. Despite these changes, the yield curve remains very flat on the long end with the 30 year treasury just below 3%. Accordingly, municipal bonds rallied returning .87% for the quarter. Finally, The Fed removed a key statement that existed from previous statements, in that it no longer sees a need to keep rates low for an extended period of time.
Oil, Gold and the U.S. Dollar
Oil rallied during the quarter and closed up 15% at $74.15 per barrel which is more than 61% higher than just twelve months ago. Oil began the year at $60.42 per barrel. Gold closed the quarter at $1,251 per ounce, 6% lower than $1,323, its closing price on March 31st 2018. Gold began the year at $1,306.00. The WSJ Dollar Index, which measures the currency against a basket of 16 others, rose 5.1% in the second quarter for its first quarterly gain since 2016.
S&P consensus earnings forecasts are still trending higher for the 3rd and 4th quarters of 2018 and into 2019. Increased corporate earnings are what ultimately drive stock prices higher, despite the political rhetoric, which often wins the news feeds. That being said, we are continuing to favor U.S. equities over International holdings. However, the lack of resolution regarding U.S. trade policy is a cloud hanging over the entire market. The U.S. is showing no signs for imminent recession but, given this trade uncertainty, there will undoubtedly be volatility ahead. Taking a disciplined approach can be best in this uncertain environment with no big bets being placed either way. History has shown that the markets quickly adapt to any new policy that could affect earnings. We continue to monitor any policy changes on your behalf and will advise accordingly.
CRA Financial, L.L.C.