Q2 2018 Newsletter

We are in the midst of what appears to be a broken record for now.  Not a whole lot has changed since our last quarterly review as we continue to have strong economic numbers.  Several different measures of economic performance are in an accelerating growth pattern including industrial production, employment, retail sales, and new capital goods orders.  In addition, GDP is expected to expand around 2.8% this year.  This is the economy we want to have without government or monetary intervention.

What has also not changed is the tough talk from President Trump on trade policy and the potential interest rate increases by the Federal Reserve.  As to the rate increases, we would expect to see this action with rising costs for labor and costs of goods.  As to the trade war, we view this as an aggressive negotiating stance Trump has taken, but I will state again that an all-out trade war with China, Canada, Mexico, and the EU would not be good for markets.

Interest rates continued pushing higher on the short end while longer-term rates have not been climbing, pushing us towards an inverted yield curve.  This is leading quality fixed income into negative return territory for the first time since 2015.  We would expect our longer-term rates to be heading higher as well, but there is an artificial demand for US Treasuries right now because of actions by Japan and the European Central Bank.

For the stock market, we have a tale of two cities.  While broader measures of the stock market ended the 6 month period slightly negative or positive depending on which measurement you use, we are finding that most of the gains are concentrated in a few different areas (and a few different stocks to be exact).

By example, when the FANG stocks which include Apple, Microsoft, Facebook, Alphabet (Google), and Netflix are removed from the S&P 500, the return of the market drops well into negative territory.  More defensive sectors like Consumer Staples and Utilities are down more than 10% along with the financial sector being down.  Dividend-paying names as a group are struggling as focus is back on growth names and because of rising interest rates.

Looking ahead, we continue to see a strong economic backdrop for the remainder of this year with slowing growth potentially showing up in the last quarter.  We believe equity markets could finish this year with modest gains and we expect money will eventually flow back into the more defensive sectors.  The wild card?  Trade.  This will be a waiting game.  We have positioned the portfolios to address rising interest rates and we will continue to make adjustments as this cycle pushes forward.  As always, thank you for your trust.

Best Regards,
Marc Henn CFP ®, President

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