MONTHLY MARKET INSIGHTS | JULY 2018

US Markets

Markets were mixed in June amid more menacing trade tariff talk and a rising U.S. dollar.

The Dow Jones Industrial Average fell 0.59 percent, while the Standard & Poor’s 500 Index gained 0.48 percent. The NASDAQ Composite led for the second-consecutive month, tacking on 0.92 percent.1

	Knowing what must be done does away with fear.
Rosa Parks, Civil Rights Activist

June began on an optimistic note as a strong jobs report, good manufacturing numbers, and a retreat in the U.S. dollar sent stocks higher.

Fed Watch

The much-anticipated summit meeting between North Korea and the U.S. proved to be uneventful, as did the Fed's announcement that it was raising the federal funds rate by 0.25 percent. The same week saw a rise in trade tariff rhetoric, sapping the positive momentum that marked the start of the month.

Tech Stocks & Tariffs

For some time, the markets have reflected leadership in technology companies and small-cap stocks. Both groups have reported solid earnings growth, and there is a belief that they would be less affected by trade tensions.

This divergence with large-cap stocks became more pronounced as additional tariffs were announced by the U.S. and its trading partners, including the prospect of tariffs on auto imports from Europe. This war of words dampened investor enthusiasm and dragged down multinational industrial companies.

Trade Wars & the Dow

To understand how heavily trade friction has weighed on the markets, consider this. Of the 17 times that the Dow Industrials have moved lower by more than one percent this year, eight of those instances have been attributed to trade concerns, accounting for an aggregate decline of 3,258 points in the Dow.

Conversely, of the 19 times that the Dow increased by more than one percent, only five of such instances were attributable to trade-related news, resulting in an aggregate gain of 2,122 points.2

The final week of trading began with a broad retreat, largely retracing the month’s gains. Stocks were whipsawed in the following days by a succession of trade headlines, until back-to-back daily gains ended the month on a positive note.

Sector Scorecard

S&P 500 Index sector performance reflected a sharp divergence in returns, with strong gains posted in Consumer Discretionary (+2.81 percent), Consumer Staples (+3.37 percent), Energy (+1.19 percent), Real Estate (+4.62 percent), and Utilities (+2.73 percent). Weak results were recorded in Financials (-4.25 percent), Industrials (-5.56 percent), and Materials (-1.93 percent). Communication Services (+0.00 percent), Health Care (+0.29 percent), and Technology (-0.36 percent) ended generally flat.3

U.S. Market Recap for June 2018
S&P 500 0.48% Month ‌ 1.67% Year-to-Date	NASDAQ 0.92% Month ‌ 8.79% Year-to-Date	Russell 1000 0.51% Month ‌ 1.90% Year-to-Date	10-Year Treasury 2.86% Month ‌ 0.46% Year-to-Date
Yahoo Finance, June 30, 2018. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the federal government as to the timely payment of principal and interest. However, if you sell a Treasury Note prior to maturity, it may be worth more or less than the original price paid.

What Investors May Be Talking About in July

The first-quarter’s earnings season was exceptionally strong, with 78 percent of S&P 500 companies reporting earnings above mean estimates.4

These results even sparked worries that perhaps we had seen “peak earnings.” However, the market’s attitude has moved on, turning to its usual, “What have you done for me lately?” The second-quarter earnings season -- kicking off in the next few days -- will indicate much about where things are headed.

Expectations on Wall Street are running high. Typically, analysts revise earnings estimates lower in the first two months of a quarter, but not this year. Analysts’ earnings estimates for the second quarter saw the second-largest upward adjustment since Q2 2011.5

Investors could view strong results as a potential catalyst for higher stock prices. However, forecasts also may get too high, potentially setting the stage for disappointment should corporate earnings fail to meet lofty expectations.

In recent weeks, the markets have focused on tariffs, interest rates the dollar. But Wall Street is expected to shift its attention to earnings reports -- along with any guidance for future quarters -- to gauge whether the pick-up in economic activity is translating to stronger earnings.

World Markets

Rising trade tariff rhetoric and concerns of economic softness pressured global markets, sending the MSCI-EAFE Index lower by 2.38 percent.6

European stocks were mixed.7

Pacific Rim markets also were mixed, with Hong Kong down 5 percent and Japan slightly higher. Australia posted a solid gain, picking up 3 percent.8

World Market Recap for June 2018
Emerging Markets	June	Year-to-Date
Hang Seng (China)	-5.0%	-3.2%
Kospi (Korea)	-4.0%	-5.7%
Nikkei (Japan)	0.5%	-2.0%
Sensex (India)	0.3%	4.0%
Jakarta Composite (Indonesia)	-3.1%	-8.8%
Bovespa (Brazil)	-5.2%	-4.8%
IPC All-Share (Mexico)	6.7%	-3.4%
Merval (Argentina)	-11.4%	-15.6%
ASX 200 (Australia)	3.0%	2.1%
Europe
DAX (Germany)	-2.4%	-6.8%
CAC 40 (France)	-1.4%	0.2%
Dow Jones Russia Index (Russia)	-0.8%	0.0%
FTSE 100 (Great Britain)	-0.4%	-0.3%
Yahoo Finance, June 30, 2018. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risks unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

Indicators

Gross Domestic Product

First-quarter economic growth was revised lower, from 2.2 percent to 2 percent, though it was higher compared with the first quarter 2017.9

Employment

Nonfarm payrolls jumped by 223,000, sending the unemployment rate to 3.8 percent, an 18-year low. The pace of wage growth also picked up, rising 2.7 percent from a year ago.10

Retail Sales

Retail sales jumped 0.8 percent in May, posting their largest one-month increase since November.11

Industrial Production

Industrial output ticked lower, falling 0.1 percent. After three consecutive months of increases, the drop was attributed to a fire at a major auto parts manufacturer.12

Housing

Housing starts increased 5.0 percent in May, rebounding to their highest level since July 2007.13

New home sales leaped 6.7 percent, propelled by a sharp sales increase in the South, while other regions were flat or saw declines.14

Sales of existing homes fell 0.4 percent from April’s levels and declined 3.0 percent year-over-year.15

Consumer Price Index

Consumer prices rose 0.2 percent in May and 2.8 percent from a year earlier, suggesting that price pressures may be building amid strong economic growth.16

Durable Goods Orders

Orders for products designed to last longer than three years fell 0.6 percent. Year-to-date, durable goods orders are higher by 9.9 percent over the same period last year.17

The Fed

The Fed raised its federal funds rate 0.25 percent, signaling to investors that it could potentially accelerate the pace of rate hikes should strong economic growth push inflation higher.

The Fed also announced that the markets should expect four interest rate increases this year, instead of the three it originally projected for 2018. There have been two increases in the federal funds rate so far this year.

In a post-meeting press conference, Fed Chairman Jerome Powell emphasized the strength of the U.S. economy, and the Fed’s goal of keeping it from becoming overstimulated, while not undermining current growth.18

By the Numbers