Second Quarter Market Review

The main theme in the second quarter could best be described by the three T’s: trade, tariffs, and tweets. Although not as severe as the first quarter, volatility was present in equity markets as tweets about increased tariffs on China, our European allies, and their associated effects on global trade and growth dominated headlines. Despite this, markets shrugged off the concerns with US equities. Small caps, energy, and technology sectors were bright spots, while industrials and financials lagged. Industrials suffered not only from trade fears, but from concerns that global growth (and associated capital expenditures) could be slowing, while financials suffered from a flattening yield curve and sluggish trading volumes and loan growth. Energy rallied this quarter on the back of a 14% increase in crude prices, coupled with a favorable supply and demand backdrop. The “FAANGs” (i.e. Facebook, Amazon, Apple, et al) continued to provide leadership to the equity markets, as BofA Merrill Lynch recently reported that the FAANGs market capitalization stood at $3.3 trillion, larger than the FTSE 100, or France’s CAC 40 index.

While unimpressive, global fixed income returns were positive and the US bond market rallied late in the quarter in the face of another 25 basis point increase in the Federal Funds rate. The fixed income market was dominated by commentary surrounding the flattening US yield curve. The spread between the 10 year and 2 Year Treasury (a measure of yield curve steepness) stands at roughly 30 basis points, its tightest spread in over 10 years. The Federal Reserve has acknowledged the flattening yield curve and its historical signaling effect of predicting market downturns, however there seems to be some disagreement among policy officials as to its reliability given the unprecedented amount of liquidity and global accommodative policy by foreign governments. The Fed signaled its intention for 2 more rate hikes in 2018.

Despite escalating trade tensions and their adverse impact on corporate profits, supply chains, and business investment/visibility, the market largely ignored the uncertainty, choosing to focus on the positive fundamental backdrop. Analysts predict S&P 500 earnings growth of 20% in the second quarter, while the value of tax cuts, declining joblessness, and deregulation continue to reverberate through the economy for the remainder of the year. Although we acknowledge the potential headwinds caused by rising wages, commodity prices, and input costs, we have seen that markets can continue to rise in the face of slowing earnings growth and still see positive catalysts like mergers and acquisitions, share buybacks, and potential capital investment to be supportive of any near term pullbacks in the market. We continue to believe a long-term investment perspective in tandem with a diversified portfolio are key to investment success.

This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. Actual economic or market events may turn out differently than as presented above. © 2018 Madison Wealth Management