Tariffs and trade concerns weighed on financial markets in June. U.S. dollar strength was a headwind for foreign asset prices. Emerging markets sank and many commodities slid. U.S. stocks fared relatively well. Bonds mostly held their ground.
The wall of worry seems fairly high as we move into the 3rd quarter. Populism, factionalism and protectionism seem to be on the rise globally, and the possibility of tariffs to leading to an all-out trade war is real. Economic growth outside the U.S may be less robust than expected.
The U.S. Federal Reserve seems more hawkish these days. The Fed followed through with another short-term rate increase in June, and has telegraphed that interest rate hikes into 2020 are likely.
The table below shows month-to-date and year-to-date returns for different segments of the financial market. Smaller companies and the technology sector did particularly well in June and are outperformers this year. Drilling deeper into the numbers, we find that just 8 stocks – all large, fast-growing technology companies – have been a primary driver of YTD returns for the S&P 500 index of large cap stocks.
We are not expecting a quick resolution to the trade issues, so markets could be knocked around as negotiations play out over the summer. However, we do expect the data in the near term to show that the U.S. economy is strong, which could provide support for equities and corporate bonds. Also, we’ll likely hear good news from U.S. corporations as they begin to report 2nd quarter earnings. From the perspective of most consumers and many businesses, the U.S. economy is in good shape and the outlook remains constructive.
Rob Kania is Principal and Co-Founder of Laurentide Advisory