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Despite end-of-the-month volatility, all of the major domestic equity indices were up for the second quarter.

The three major domestic equity indices ultimately ended in positive territory for the second quarter, after zigging and zagging on headline news, particularly toward the end of June. Volatility due to the threats of escalation on trade continues to be an overhang on the market, explains Ed Mills, Raymond James managing director of equity research and Washington policy analyst. In the past month, the administration has threatened an additional $400 billion worth of tariffs on Chinese goods, and reports circulated that the administration had planned to invoke an emergency economic power to restrict Chinese tech investment in the United States and implement export controls on technology transfers.

Uncertainty, in this case regarding global trade tensions, often leads to concern among investors. And it seemed investors were trying to digest somewhat conflicting reports of peak earnings, tariff threats and political divisiveness, shrinking yield spreads, lower unemployment and gradually rising inflation. 

Foreign financial markets weathered an eventful month as well, as global tariffs hurt these traditionally more open economies. However, Raymond James European Strategist Chris Bailey believes that any lessening of these concerns – which remains very plausible – provides investment opportunities.

Despite end-of-the-month volatility, all of the major domestic equity indices were up for the second quarter. A longer view shows that the NASDAQ, the Standard & Poor’s 500 and the Russell 2000 ended the first half of the year in healthy territory, but the Dow Jones Industrial Average didn’t keep pace.

Performance reflects price returns as of 4:30 EDT on June 29, 2018.

Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:

• “The U.S. economy is doing very well,” according to Federal Reserve (Fed) Chair Jerome Powell. The job market has continued to tighten. Inflation, as measured by the core PCE Price Index, has moved up near the Fed’s 2% goal, explains Chief Economist Scott Brown.
• Monetary policy is still accommodative, and Fed officials believe that further gradual increases in short-term interest rates are likely to be warranted. The Fed is trying for a soft landing, a task that has been difficult to achieve in the past.
• Trade policy uncertainty has had a modest impact on the overall economy so far (more significant for some industries than others), but investors may fear that a broader trade war would be more disruptive to the U.S. and global economies.
• Real gross domestic product (GDP) growth is expected to have picked up in the second quarter, but comprehensive benchmark revisions (due July 27) may shift things around.
• Brown believes GDP growth should ultimately settle around a more moderate pace (i.e., 1.5% to 2.0%), reflecting slower growth in the labor force.

• Despite recent volatility, domestic equities have held up much better than the rest of the world with emerging markets getting hardest hit on trade tensions and the rising U.S. dollar.
• Economic activity and earnings remain pillars of support for the U.S. equity market. Second-quarter earnings season will begin in a few weeks, and estimates have ticked higher since the end of a very strong first-quarter earnings season.
• Managing Director of Portfolio & Technical Strategy Michael Gibbs and Senior Equity Portfolio Analyst Joey Madere are looking to get more color from companies on the impacts of global trade negotiations, margins, inflation and interest rates.

• In three instances since 1986, Fed tightening has led to an inverted curve that was then followed by a recession, but that pattern may not necessarily hold given some of the unique aspects of the current climate, explains Senior Fixed Income Strategist Doug Drabik.
• Drabik notes that it has been two and a half years since the Fed’s first hike (December 2015) which is significantly longer than what led to the past three inverted curves. There is no guarantee we will invert the curve resulting in a recession or that we won’t. The latest round of Fed hikes was preceded by more than seven years of zero interest rates and market effects spurred by quantitative easing.
• Yields and spreads have shifted such that even investors in the highest tax brackets may optimize their short-term returns (i.e., five years and in) with corporate bonds.
• The most recent bond activity appears to be a reaction to headline news. Although some information, such as the potential trade war, is inflationary in Drabik’s view, the safe haven trade into U.S. bonds is at least temporarily countering those effects.

• Concerns about disruptions to world trade flows continue to build, particularly impacting emerging markets (e.g., the Indian rupee hit an all-time low against the dollar, and the Chinese stock market flirted with bear market territory), according to European Strategist Chris Bailey.
• In Europe, Germany experienced some unexpected domestic political instability as Chancellor Merkel faced a new challenge to her current political coalition.
• European economic reform efforts appear to be taking a slight backseat to discussions of potential trade tariff responses and internal regional debates such as immigration.
• Using conventional valuation criteria, both emerging and developed markets outside of the United States appear to be attractively positioned for medium-term capital growth and income investors.

• We believe you should continue to make decisions based on your long-term goals. A well-diversified portfolio should allow you to participate in upside potential here and abroad, as well as serve as ballast against any short-term volatility.

Your advisor will continue to watch for legislative updates as well as economic developments. In the meantime, please reach out to him or her if you have any questions.

Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the Research Department of Raymond James & Associates, Inc., and are subject to change. Past performance is not an indication of future results and there is no assurance that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Small and mid-cap securities generally involve greater risks. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification. The performance noted does not include fees or charges, which would reduce an investor’s returns. Asset allocation and diversification do not guarantee a profit nor protect against a loss. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. Price/Earnings Ratio is the price of a stock divided by its earnings. It gives investors an idea of how much they are paying for a company’s earning power. While interest on municipal bonds is generally exempt from federal income tax, it may be subject to the federal alternative minimum tax, state or local taxes. U.S. Treasury securities are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. Chris Bailey is with Raymond James Euro Equities, an affiliate of Raymond James & Associates, and Raymond James Financial Services. Material prepared by Raymond James for use by its advisors. Not approved for rollover solicitations.