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Strategic Insights

Volume 7, Edition 23 | June 26 - June 30, 2018

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Leaning into the Wind

Doug_Walters Doug Walters | Articles

Read Time: 5:00 min


Believe it or not we are halfway through 2018! Equities have found a way to positive territory despite a steady headwind of uncertainty. We contemplate the investing outlook for the balance of the year…

Market Review

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.

World Cup Update

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.

Strategy Update

Contributed by Max Berkovich


Homeward Bound

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.


Spending Billions

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 ReturnsWeek (%)Year (%)
S&P 500 -2.21.7
S&P 400 (Mid Cap)-2.02.7
Russell 2000 (Small Cap)-2.47.0
MSCI EAFE (Developed International)-3.1-5.5
MSCI Emerging Markets-6.0-9.6
S&P GSCI (Commodities)3.98.8
MSCI U.S. REIT Index2.8-1.0
Barclays Int Govt Credit0.3-1.8
Barclays US TIPS0.7-1.1

The Week Ahead

Contributed by Max Berkovich ,

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.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $2 billion.