Review & Outlook

Second Quarter 2018

Executive Summary

July 10, 2018
John Augustine, CFA, Chief Investment Officer

Strong Economy, Flat Markets

As of this writing, the Federal Reserve’s Nowcasting US GDP Model shows the second quarter is on-pace for over 4% growth. That’s a strong number that we haven’t seen since mid-2014.

Leading US economic growth in the second quarter has been a mix of consumer spending, business investment, housing starts and exports….yes, exports, even with all the trade and tariff headlines. Exports have been over $200 billion a month from last November through this April. They currently stand at a record $211.2 billion.

With the better economic numbers, our nation’s unemployment rate in May matched a 48-year low level of 3.8%. Also with the better economic numbers, the headline inflation rate rose to 2.8% year-over-year – returning to a level not seen since 2012.

Earnings per share for the S&P 500 grew 24.3% year-over-year in the first quarter when GDP growth was 2%. We will now be looking forward to what a stronger US economy did to for them in the second quarter. Currently, estimates are for 20.5% earnings per share growth in the quarter.

However, even with the good economic and earnings numbers, stocks had a lackluster second quarter. The major international stock indexes recorded price losses, while the domestic indexes only saw small single-digit gains, led by US small cap stocks.

In the bond market, yields stayed mostly stable and range-bound in the second quarter, after rising in the first quarter. Overall total returns for bond indexes year-to-date are flat to slightly negative (see above). We suspect the path-of-least-resistance for bonds yields in second half of the year is to move slightly higher.

Arguably, the trade headlines took their toll on stocks and bonds in the second quarter. Hence, we look forward to some kind of trade negotiations commencing in the third quarter to level the playing field and allow financial markets to enjoy the economic and earnings successes of the first half of the year.

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