2nd Quarter Newsletter 2018
Summer weather is here at last and for New Englanders, one of the coolest springs in memory is officially over. While the current heat wave may be a little too much of a good thing, we can’t forget the snowstorms continuing beyond mid-April, the nor’easter in early June, and even the heartiest Mainers grudgingly turning the heat back on several days that month. A look at average temperatures and precipitation for the period would indicate a somewhat cooler and drier period than normal; and adding the hot temperatures for much of early July would further “normalize” the average temperature. Living through that period day-to-day, however, was a much bumpier ride. We notice a similar phenomenon in the performance of investment markets over the second quarter and into early July.
You will recall that the first quarter brought significant volatility back into the markets (see the First Quarter newsletter on our website, www.galarneaugroup.com). Chuck Royce, Portfolio Manager for The Royce Funds, characterized April through June as “a really curious quarter” which “finished on a wild and bearish tone”, and yet was “less volatile and more bullish than the first quarter.” For the period Jan. 1, 2018 through May 31, 2018, the S&P was up 3.1% ytd, the Dow Jones Industrial Average up 0.7%, and the Nasdaq composite up 9.9%. (Franklin Templeton Investors). It was a rough ride up. The latter part of June brought performances down again, sending the Dow into negative territory. Through the close on Friday, July 6, the S&P was hanging in at positive 3.2%, and the Nasdaq was up 11.4% ytd. The DJIA however, was at -1.1%; according to Lord Abbett’s Market View, week ending July 6.
A broad rally on Monday, the 9th, continuing through Tuesday, turned the Dow positive for 2018, and the S&P hit a 4-month high as of Tuesday’s close (Reuters: Amy Caren Daniel as reported on Yahoo Finance July 11). Strong economic numbers and positive earnings reports as the new quarter began have fueled optimism. Nonfarm payrolls reported Friday, July 6, were stronger than expected and April and May employment numbers were revised upward.
What may drive the markets as we go through the summer? Energy was the third best performing sector ytd through May 31, up 6.6% ytd. In front of it were Information Technology and Consumer Discretionary (www.franklintempleton.com). Higher oil prices in early July are helping fuel the recent rally. Many analysts have expected value stocks, such as those in the energy sector, to outperform in 2018. With a clearer idea of what action the Fed expects to take for the rest of the year, and company earnings forecasts and results continuing to develop optimism, we may see further improvement in value stocks. Advances in technology continue to help American companies improve efficiency. Consumer confidence appears to remain positive ytd, despite concerns such as trade wars.
The potential negative impacts of a trade or tariff war on our economy is one of the major concerns getting press in the last several weeks. And while unemployment hitting an 18-year low is a positive, labor shortages are already beginning to affect the service industry and trucking, among other industries. Another case of too much of a good thing? Lack of workers may hamper earnings for many businesses and could cut short the economic growth cycle we have been enjoying. Trade wars do not happen often. There are many variables, and little history from which to draw conclusions about the effects of a trade war. Likely, new policies and tariffs would have both positives and negatives for the U.S. economy. Over the near term, uncertainty is likely to be a factor in market volatility. However, many economic analysts believe that ultimately, countries will arrive at new policies with one another which are mutually beneficial for economic growth.
On the fixed income side, municipal bonds continue to outperform corporates and the 10-year treasury. Franklin Templeton reports ytd returns of -3.3% for 10-year Treasuries, -1.8% for the U.S. Bond Index, and -0.3% for the Municipal Bond Index. Twelve month results are -3.8% for 10-year Treasuries, -0.6% for U.S. Bond Index, and +1.1% for the Municipal Index. We continue to favor investment grade municipals over Treasuries in taxable accounts for total performance and lower volatility.
With more record-breaking heat in the forecast, we hope you all spend time enjoying your favorite summer activities. Keep cool, stay safe, and try to avoid stress. We will be watching developments in the markets and modifying our game plan as necessary, seeking protection when storms develop and finding opportunities as they arise. If you are feeling concerned or have questions, don’t hesitate to give us a call. If you have any friends or family that may be looking for a new financial advisor, please consider giving us a referral!
Happy Summer;
The Galarneau Group
