MARKET BRIEFS: Q2 RECAP AND Q3 OUTLOOK

This Bull Is Old, But Not Sick…   |   Second Quarter Market Review   |   Trade Policy and Unintended Consequences

Introduction
The current rally in the US stock market is now in its 9^th year and appears to be on track to become the longest in history. Since its official start on March 9, 2009, the current US stock rally has returned a whopping 302%¹ from the market’s low at the end of the Great Financial Crisis. Since then it has grown, uninterrupted by a decline of 20% or more (i.e., the definition of a bear market). The prospect of breaking the longevity record is a double-edged sword for investors who are grateful for the rewards provided, but anxious about what they can look forward to in such an old rally. This anxiety may be especially acute today with global equity markets having returned -0.8% for the first half of 2018, when for the same period last year, they had already returned +11.8%². Investors may be fretting about this geriatric market, assuming death is near and debating whether the cause of death will be rising interest rates, excessive valuations or trade policy. But market returns are not earned evenly over time and any debate over the cause of death seems highly premature given the economy doesn’t currently seem to be suffering from any of these illnesses. Like people, market rallies don’t die because they’re old, they die when an illness becomes acute.

Valuations seem defensible
While there is no question this rally is old, it seems in surprisingly good health. Economic growth appears to be strong (NY Fed and Atlanta Fed forecasting 2.8% and 3.8%, respectively for Q2), corporate earnings continue to grow and even though interest rates have been rising, credit availability is still easy.

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¹ Source: Barron’s 6/30/2018
² Morningstar

1. The S&P 500 returned 3.4% in Q2, providing a year-to-date return of 2.6% for the period ending June 2018¹. The US markets were lifted by a robust earnings season with the number of companies beating estimates hitting record levels and economic data being better than expected.
2. Smaller cap companies saw the strongest returns during the quarter with a return close to 8% for the Russell 2000 index². The strong performance for small cap stocks helped their 3 and 5-year performance catch up with that of large caps stocks, which have consistently outperformed. In addition to the turnaround seen in small caps, there was also a turnaround with strong performance in dividend equities and REITs. US REITs was the best performing sector for the quarter, with a return of 10%, which lifted the year-to-date return into positive territory at 1.8%.

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¹ Morningstar
² Ibid

The story
Following through on his pledge to hold trading partners to task for taking advantage of the U.S., President Donald Trump escalated trade tensions in Q2. This Administration’s willingness to use less conventional and more aggressive methods suggests that trade is a higher priority than it has been for prior administrations.

The reality
China and Mexico are commonly portrayed as villains in discussions of the U.S.’s $500 billion annual trade deficit (which, by the way, is down from a 2006 peak of more than $760 billion). However, according to the US Census Bureau, the United States is a net importer of goods from nearly all regions (except Latin America) and in all sectors (except food, agriculture and petroleum).

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