2nd Quarter 2018 Economic & Market Review
Economy and the Federal Reserve
Global economic growth continues at a steady rate. U.S. GDP came in at a 2.0% annualized rate for 1Q (information reported in Q2); this reading was slightly below the expected rate for the quarter but above the 1.4% annualized rate for the same quarter last year. As reported last quarter, the economy is going into the 9th year of its expansion, the 3rd longest on record. The employment picture remained strong in Q1 with the unemployment rate at 4.1%, a cyclical low (the current unemployment rate has fallen to 3.8%). The housing market was mixed, as year over year home sales were flat to slightly positive, while year over year home prices were up 5.6%. The Federal Reserve (the “Fed”), in March, raised the federal funds rate target by 25 basis points to a range of 1.50% – 1.75%; in June, the Fed again raised the federal funds rate target by 25 basis points, to a range of 1.75%-2.00%. Market expectations are for 1-2 additional increases in 2018.
Global equities have exhibited greater volatility in 2018, with a recovery in most markets in the 2Q of 2018. After equities exhibited negative returns for most markets in the first quarter, US markets generally recovered in the second quarter of 2018. Domestically, the S&P 500 Index, representing large-cap stocks, returned +3.4% in Q2 after a -0.8% return in Q1. Continuing to break prior patterns, large-cap under performed its small-cap counterparts for the quarter as the Russell 2000 Index returned +7.8%. Meanwhile, the Russell Midcap Index gained 2.8% for the quarter. Growth continued to outperform value across the large and midcap spectrum for the 2nd quarter after outperforming across all capitalization sizes by historical margins in 2017. For the quarter, Energy, Consumer Discretionary and Information Technology were the strongest performers, generating gains of +13.5%, +8.2%, and +7.1%, respectively. The Industrials, Financials and Consumer Staples sectors were the poorest relative performers, posting returns of -3.2%, -3.2%, and -1.5%. respectively. Emerging Markets stocks, after being in positive territory for the first quarter, turned negative in 2Q (-7.8%). The MSCI EAFE Index (representative of developed non-U.S. equity markets) returned -0.9% for Q2.
US interest rates continued to tick upward, but at a slower rate while remaining low by historical standards. Interest rates rose for short-term U.S. Treasury securities in the second three months of 2018, in concert with the Fed’s second interest rate hike of 2018 in June. However, the yield on the 10-year U.S. Treasury note only rose slightly compared to its yield at the end of the first quarter, with concern over a flattening yield curve. The yield on the 3-month U.S. Treasury bill increased to 1.91% by quarter-end, up 21 basis points from prior quarter-end, while the 10-year U.S. Treasury note yield ended the second quarter of 2018 at 2.85% vs. 2.73% on 3/31/18. For the second quarter, the Bloomberg Barclays U.S. Aggregate Bond Index (representing investment grade U.S. bonds) returned -0.2% (-1.6% year to date); the Bloomberg Barclays Long Credit Index was down -2.7%( -6.4% year to date) and the Bloomberg Barclays U.S. Aggregate Corporate High Yield Index returned +1.0% (+0.2% year to date).
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