Read the complete Market and Economic Update in our July 2018 Newsletter here.

Market Commentary: Following a first quarter during which broad developed domestic and international equity indexes were generally negative, the second quarter produced mixed results. U.S. equity indexes posted positive returns while international indexes were negative. The S&P 500 generated a 3.4% return for the quarter while the MSCI EAFE index was down 1.2%. The S&P 600 small cap index reached all-time highs. Emerging markets suffered through a difficult quarter, falling nearly 8%. Fixed income markets were broadly negative as the Barclays U.S. Aggregate Bond index fell 0.2% and the Barclays Global Aggregate Ex-USD index slid 4.8%.

Macro factors provided a tailwind in the U.S. as the economic expansion became the second longest in history. Following June’s Federal Open Market Committee policy meeting, Fed Chairman Jerome Powell noted, “the economy is doing very well…the overall outlook for growth remains favorable.” This confidence led the Fed to raise interest rates 25 bps in June and signal the possibility of two additional hikes by year end. In contrast, and on the heels of some disappointing data, the European Central Bank (ECB) announced there would be no rate hikes until at least the fall of 2019. The ECB also announced a plan to halt its bond purchasing program by the close of 2018.

Market Outlook: Our economic and market outlook remains generally positive for the remainder of 2018 and into 2019. Strong earnings growth and improving capital investment should support the US stock market. At the same time, we remain sensitive to signs of late-cycle dynamics in the U.S., including higher inflation and interest rates which could put pressure on stock prices. As it stands now, wage growth appears manageable and slow moving, and shouldn’t drive interest rates or inflation to the point where the equity bull market rides off the rails.

The clearest risks to equity returns include geopolitical concerns and potential trade issues. An escalation of current bickering into an actual trade war could hurt stock returns. A rising dollar would also continue to pressure emerging markets, despite their attractive fundamentals and valuations. While continued tightening by the Fed is expected to be a drag on fixed income results, municipal bonds appear relatively attractive for taxable accounts. Fundamentals are solid as state and local governments continue to benefit from an improving economy. Defaults remain low and credit upgrades exceed downgrades.