At the half way mark for this year, the stock market experienced divergences between sectors with tech and oil rallying, while “blue chip” stocks began to slip. The escalating global trade war, in conjunction with rising interest rates and a strengthening dollar, put pressure on the Dow Jones Industrial Average which retreated 0.59% last month and closed just below its 200-day moving average last month. The more broad-based S&P 500 index posted a gain of 0.48%, while the tech-heavy NASDAQ index led the month rising 0.92%. Worldwide, equity benchmarks treaded water or posted losses as the U.S., European Union, and China exchanged tariff threats. (1,2)
Domestically, the U.S. economy fared well. Hiring and retail sales data were excellent, consumer confidence appeared strong, and industrials were growing impressively. Inflation pressure is mounting, and in turn, the Federal Reserve responded with another interest rate hike which was expected. Real estate numbers were mixed with new home sales improving, but residential resales declining. The ongoing trade frictions continue to mute the upside movement which we saw earlier in the year.
Global Trade Dispute Update
The Trump administration announced tariffs in June aimed at China which includes $34 billion on Chinese imported goods which enforcement would begin on July 6th, with another $16 billion to be potentially implemented in the future. The administration also targeted the European Union announcing planned tariffs of 20% on automobile imports coming across the Atlantic. In response, the E.U. and China have announced retaliatory measures. (3)
What does this all mean for your investments? For the time being, expect more new tariff announcements followed by counter measures in the coming month. In the short-term, we can expect the stock market oscillation to continue as some equity sectors would be impacted more than others. In the long-term, any successful changes with the U.S. and China trade imbalance would potentially be a positive for the markets and hopefully offset short-term gyrations.
Real Estate Mixed Signals
New home sales were a surprise to the upside recently with new home purchases improving by 6.7%. However, this is likely contributed to a decline in new home prices which were down by 3.3%. Existing home sales, which account for the vast majority of residential estate transactions, weakened 2.7% in April and 0.4% in May. (4)
It is clear that the real estate market is experiencing some changes from what we have seen in recent years. There have been some signs of rising home inventory and interest rates have been stabilizing, both of which are positive for home buyers. It is important to note that recent interest rate hikes by the Federal Reserve do not directly correspond with mortgage interest rates.
The first half of 2018 is now history. The S&P has largely moved sideways, and it may keep doing so into the third quarter. America is witnessing healthy economic growth, which should continue to promote strong corporate earnings – but at the same time, investors have tariffs and interest rates on their mind. Since the end of January, the S&P has simply drifted within a 10% range. Another round of impressive corporate earnings could lift the market, or trade tensions could dampen the good news and we continue sideways. At the beginning of the year, many analysts forecasted single digit returns for the S&P 500 in 2018, and that may in fact be an accurate assessment. (5)
The largest issue at hand continues to be the potential escalation of a trade war. Given the complexity and global economic implications both for the short and long term, the impact and scope of any new developments on this issue will not fully be known until well after the agreements are made. For now, there are many positive economic indicators which continue to show a strong fundamentally economy; and until new data reveals otherwise, the overall “bullish” sentiment of the market will likely continue.
1 - quotes.wsj.com/index/SPX [6/29/18]
2 - markets.wsj.com/us [6/29/18]
3 - investing.com/economic-calendar/ [6/30/18]
4 - bloomberg.com/news/articles/2018-06-25/u-s-new-home-sales-climb-to-six-month-high-on-surge-in-south [6/25/18]
5 - marketwatch.com/story/investors-look-to-the-second-half-of-2018-expecting-growthamid-rising-uncertainties-2018-06-30 [6/30/18]
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.