Contributed by Doug Walters
We have reached the halfway point of the year. U.S. equities have managed to claw back the losses from the first quarter and then some. The 3.4% second quarter total return from the S&P 500 puts the market up 2.6% on the year. But it was not an easy climb, and we expect uncertainty headwinds to persist.
An Eventful Quarter
2018 has been a wild ride in more ways than one. It seems like ages ago, but it was just January that we experienced the euphoria of a runaway market fueled by tax cut anticipation, followed by a dose of reality with the S&P 500 falling 10% peak-to-trough over the course of about two weeks. Since then, equities have been struggling to reclaim those January highs.
The economic picture has remained fairly robust. Job growth persists, with unemployment continuing to inch down from a low base. Manufacturing continues to show confidence reduction new orders running at historically robust levels. In policy, the current administration has on balance been corporate-friendly despite populist rhetoric which would have been expected to favor those left behind over corporations.
Trade war escalation has been a major source of discussion this year amongst investment professionals as it has moved markets almost daily. A search of past editions of Insights in our Resource Hub finds that “trade” was mentioned in 17 of our 26 publications thus far this year. There appears no consensus as to whether or not the tough talk on trade and tariffs will result in incremental gains that will be good for U.S. companies or act to deteriorate of our standing and influence on the global stage. All of this leads to uncertainty which is a near-term headwind for equities.
More of the Same
Looking forward, we see no reduction in the uncertainty that has kept equities in check in 2018. The mid-term elections could be a significant market-moving event later this year and may only add to the market’s trepidation. With that said, the economic environment is still supportive, and with interest rates likely to rise further, equities remain an attractive asset as compared to bonds.
For those nervous about equities, we would caution against any attempt to pick the market top. We see market timing as an exercise in futility (see our white paper). As investors, we cannot control the market moves but can control security selection. We focus on assets that have sufficient quality to weather any market volatility and offer enough margin of safety on value to provide the potential for growth. We see this approach as well-suited for the current environment.
A couple of weeks ago, our very own David Lemire provided his insights into the 2018 World Cup (The Beautiful Game). David’s top pick, Brazil, survived the group stage. Opponents targeted their star striker Neymar, but as David predicted, diversification efforts paid off. The big surprise was that the reigning champions, German, failed to advance. Recall that David had warned that past performance does not guarantee future results. Not bad David (even if your soccer resume does not include playing against David Beckham like your colleague at Strategic). The knockout stage begins Saturday. Stay tuned.
Contributed by Max Berkovich
STRATEGIC ASSET ALLOCATION
International equities had a forgettable quarter, especially emerging markets. Domestic equities held in well despite all the trade-related drama. In particular, small-cap and growth stock were standouts. Gold failed to shine this quarter, and international fixed income was a drag. Interest rates moved higher in general, but short interest rates (2-year U.S. Treasury) moved higher a lot more than longer rates (10-year U.S. Treasury). Speaking of interest rates…
- Strategic initiated a small position in Floating Rate Investment Grade allocation for our portfolios in hopes of adding an investment that benefits when interest rates rise.
- Strategic also reduced its small capitalization exposure and its exposure to large/mid-capitalization growth after a standout quarter from the two asset classes.
- Cash levels were lowered as we found a home from equity trims in the lower duration fixed income.
The Energy sector was the undisputed leader for the quarter, with Health Care a distant second. The Industrial sector, on the other hand, was blown off course by trade-related headwinds. The biggest stories this quarter include…
- The Walt Disney Co.’s (DIS) pursuit of media asset of Twenty First Century Fox (FOX, FOXA). Comcast Corp. (CMCSA) is the other bidder.
- Procter & Gamble Co. (PG) acquiring the consumer health unit of Germany’s Merck KGAA (MKKGY) for $4.1 Billion.
- NXP Semiconductors Inc.’s (NXPI) continued attempt to consummate a merger with fellow strategy holding Qualcomm Inc. (QCOM) with the deal caught up in trade negotiations with China.
STRATEGIC EQUITY INCOME
The Health Care and Energy sectors both had a solid quarter, but not enough to topple the leader, Consumer Discretionary. While the Financial sector was dragged down by an ever-flatter yield curve, Industrials trade-related woes managed to sink the sector to the bottom. Major stories include…
- Walmart Inc. (WMT) made a $16 Billion investment in a private Indian e-commerce company Flipkart.
- Microsoft Corp. (MSFT) buying software development platform GitHub for $7.5 Billion.
- A court ruling allowed for Time Warner Corp. (TWX) to be acquired by AT&T Corp. (T) in an $85 Billion tie-up that had been held-up since November of 2016.
|Indices & Price Returns||Week (%)||Year (%)|
|S&P 400 (Mid Cap)||-2.0||2.7|
|Russell 2000 (Small Cap)||-2.4||7.0|
|MSCI EAFE (Developed International)||-3.1||-5.5|
|MSCI Emerging Markets||-6.0||-9.6|
|S&P GSCI (Commodities)||3.9||8.8|
|MSCI U.S. REIT Index||2.8||-1.0|
|Barclays Int Govt Credit||0.3||-1.8|
|Barclays US TIPS||0.7||-1.1|
The Week Ahead
FUME over Tariffs
Fourth of July in the middle of next week means markets are closed on Wednesday and volume in the market should be muted the rest of the week.
Unemployment Report on Friday isn’t expected to make many waves.
- Expectations are for 188K jobs created and the unemployment rate to remain unchanged at 3.8%.
Minutes of the June Federal Open Market Committee meeting will be released on Thursday.
- We expect little fanfare as most traders will probably extend their 4th of July holiday.
Economic releases include ISM, PMI, Trade balance, vehicle sales, and factory orders.
- The trade balance will receive significant attention as the trade deficit is expected to come in slightly north of $46 Billion for May.
Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets over $1.2 billion.Overview
Strategic Financial Services, Inc. is a SEC-registered investment advisor. The term “registered” does not imply a certain level of skill or training. “Registered” means the company has filed the necessary documentation to maintain registration as an investment advisor with the Securities and Exchange Commission.
The information contained on this site is for informational purposes and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. Every client situation is different. Strategic manages customized portfolios that seek to properly reflect the particular risk and return objectives of each individual client. The discussion of any investments is for illustrative purposes only and there is no assurance that the adviser will make any investments with the same or similar characteristics as any investments presented. The investments identified and described do not represent all of the investments purchased or sold for client accounts. Any representative investments discussed were selected based on a number of factors including recent company news or earnings release. The reader should not assume that an investment identified was or will be profitable. All investments contain risk and may lose value. There is no assurance that any investments identified will remain in client accounts at the time you receive this document.
Some of the material presented is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Strategic Financial Services believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
No content on this website is intended to provide tax or legal advice. You are advised to seek advice on these matters from separately retained professionals.
All index returns, unless otherwise noted, are presented as price returns and have been obtained from Bloomberg. Indices are unmanaged and cannot be purchased directly by investors.
Advisory Services offered through Strategic Financial Services, Inc. Strategic Financial Services, Inc. and Cadaret, Grant & Co., Inc. are not affiliated.