Market Insight - July 2018
Financial markets have improved considerably since the end of March. However, investor enthusiasm, sustained by improving GDP numbers, rising employment, and moderate interest rates, has not yet translated into sustainable market gains. Investors are struggling to balance short-term political uncertainty and tariff and trade concerns, with the extraordinary prospects for future economic growth and productivity in global markets.
The S&P 500 finished the second quarter with a 3.43% gain, up 2.65% year-to-date. Larger companies, with their greater exposure to international trade, lagged behind smaller firms with fewer tariff concerns; the S&P Small-Cap 600 added 9.39% in 2018, while mid-sized companies are up 3.49%. In addition, investors continued to favor companies priced for their earnings growth, including technology, rather than value-oriented sectors, a trend that has been in place for all save two of the past seven years.
A stronger dollar took its toll on international stocks. The MSCI/EAFE benchmark for developed markets declined 2.75%, while emerging markets gave back nearly 7% of last year’s gains. Still, the probabilities of international investments outperforming the domestic markets are strong for several reasons; lower valuations, a higher dividend yield overseas; and the feeling that U.S. markets may have overpriced already high expectations.
Fed rate hikes as well as some inflation concerns have pressured bond prices in general, and fixed income investments have detracted from returns this year. The Ishares 7-10 Year Treasury bond fund lost 1.85 % year to date, while the Pimco High Yield Bond Fund fell 1.04%. Emerging markets bonds were hit the hardest; the T. Rowe Price Emerging Market bond fund declined over 6%. Lower prices, however, are presenting opportunities as well; the same fund is yielding nearly 6% on reinvestment. In addition, the flattening of the yield curve has meant higher income to our clients from short-term bonds.
Expectations Remain High
The consensus expectation for second quarter GDP growth from the Atlanta Fed is 4.1% with some estimates as high as 5.3%. Forecasts haven’t been this optimistic since the third quarter of 2014. Corporate earnings rose on average a remarkable 27% in the first three months of the year; second quarter earnings are estimated to improve another 21%, with similar numbers for the rest of 2018. We think the important questions for investors now are whether these economic and earnings growth rates are sustainable and whether they are properly priced in to provide meaningful returns in the second half of the year. Comparisons are likely to become more difficult moving forward.
We also want to remind our clients who are 70½ or older and IRA owners that they can direct part of their required minimum distributions to a charity or non-profit and avoid paying taxes on the amount. Under the new tax law, the number of taxpayers who can itemize will be reduced dramatically, losing their tax benefits from charitable donations. However, if the charitable contribution comes out of your IRA you reduce both your adjusted gross income and your modified adjusted income (MAGI.) This can help to lower or eliminate taxation of Social Security, and lower Medicare premiums are also possible for those with higher incomes.
The Bedminster group will be presenting one of our most requested workshops, “Investment and Financial Planning for the Surviving Spouse” on Saturday morning August 11th, 2018 from 9:00am -11:00am at Pinckney Hall in Sun City. We would like to invite all our clients and their guests to join us for this workshop, and for a buffet breakfast at 8:45am, prior to the workshop. Please RSVP to Danielle at (843) 705-5544 or click to register.
Registered Investment Advisor
Eugene Balerna, CIMA ®
Director, Investment Research