by Steve Conard, CFP®
Global equity markets have moved higher since the February 8th low in the S&P 500 Index, albeit with significantly more volatility than in the prior two-year period. Much of the up-and-down trading pattern can be attributed to ongoing international trade concerns, which have dominated the economic news since President Trump’s initial announcement regarding the enactment of new tariffs in early March. Selected industries such as steel and agriculture are already reporting negative impacts from the new tariff policy, but the overall economic impact appears to be muted thus far. Meanwhile, long-term interest rates have held steady after a rocky start to the year as the Federal Reserve has remained on schedule with its rate hike agenda, which directly affects short-term rates.
As far as 2nd-quarter corporate earnings are concerned, the tariffs have had no impact at all. Overall earnings for the most recent quarter beat expectations, which is saying a lot because expectations were high coming into earnings season. None of this has done anything to quell speculation that the Fed may be inclined to add a fourth rate increase late in the year, on top of the likely increase to be announced at the September meeting of its Open Market Committee. The potential for an additional rate hike has some Wall Street traders nervous about the prospect of the Fed over-tightening monetary policy and slowing down the economy prematurely.
As of the market close for the week ending August 17th, the S&P 500 Index is up 7.92%, year-to-date. The technology-heavy Nasdaq 100 Index, up 14.01%, continues to outperform along with the Russell 2000 Index of small company stocks (up 11.08%), which have benefited from the tax-reform legislation passed earlier this year. The good news is that the US stock market is up—at least certain pockets of the market. The bad news is that most of the gains in the large company indexes have come from two sectors—technology and consumer discretionary. Nine of the other ten sectors have performed below the broad market average, with a few still in the red YTD.
The news is worse in international stocks, with the MSCI EAFE Index falling 3.66% and the MSCI Emerging Markets Index down 9.92% since the start of 2018. Global bond markets are down in price terms across the board, with most broad sector indexes showing negative YTD total returns. Combined with the uneven performance of the US equity markets, this has made for a rocky year for many investors.
During times like these, diversification can be frustrating. Watching the stock market move higher if some of your own portfolio isn’t participating stinks. But markets typically rotate from the high flyers back to the cheaper sectors, and today’s losers may potentially become tomorrow’s winners. If only this happened on a schedule!