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Q3 2018: Economic Commentary

Global financial markets posted mixed results during the second quarter of 2018 as investors balanced strong earnings, an improving labor market and better economic growth here in the U.S. with political turmoil in Europe and deteriorating trade relations worldwide. We present a few highlights from the 2Q18 below:

  • Despite heightened geopolitical rhetoric, the S & P 500, the Dow Jones Industrial Average, and the technology-heavy Nasdaq Composite continued to trade near record highs amid positive economic data and strong corporate earnings. On the economic front, the Federal Reserve raised interest rates by 25 basis points in June to a range of 1.75% to 2%, and upgraded their assessment of U.S. economic growth. Consequently, the FOMC now anticipates raising interest rates four times in 2018.
     
  • Developed international equity markets produced mixed results during the second quarter on political turmoil in Spain and Italy, and rising trade tensions with the U.S. Gains came out of Europe, while the Pacific region lagged. On the political front, the prospect of new elections in Italy and a vote of no confidence against Spanish Prime Minister Mariano Rajoy renewed fears of a Eurozone breakup. In the emerging markets, returns were held back by weak performances from Latin America heavyweights Brazil and Mexico.
     
  • Within fixed income, results were mixed as the Fed raised interest rates and the U.S. dollar rose sharply against most major currencies. The 10-year U.S. Treasury briefly traded above the key psychological level of 3% for the first time since January 2014 before settling slightly lower to end the second quarter. Foreign un-hedged bonds and emerging markets debt fell sharply as the U.S. dollar strengthened. Investment grade core U.S. fixed income produced lackluster results, while high yield credit fared marginally better.
     
  • Real estate, both in the U.S. and abroad, advanced during the quarter. In a reversal of the prior quarter, international real estate underperformed U.S. real estate. Commodities ended the quarter higher as energy prices remained resilient. Similarly, MLPs benefited from higher oil prices, an uptick in M&A activity and lack of any significant headline news.

An important lesson from 2Q18:

  • The second quarter of 2018 was a good reminder that investors must remain mindful of geopolitical and other event risk and the associated volatility that comes with it. The second quarter was marked by heightened global trade tensions, and in Europe politics was front and center, leading many to wonder if select policy decisions, legislation or elections were enough to derail financial markets. As we enter the second half of 2018, it is more important than ever to remain properly diversified. It is our continued belief that remaining patient and adhering to a well-constructed and diversified investment portfolio anchored to your time horizon and goals remains the prudent course of action.
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