Vigilare Wealth Management Q2 2018 Commentary
By Jason@vigilarewealth.com on July 6, 2018 in Investor Lounge
Markets have been mixed through the first half of the year. Fears of inflation early on and more recently tariff talks have rattled the markets. As a result, bonds and other interest rate sensitive investments have lagged in the first half of the year, as have international equity investments and those U.S. equities tied to global trade. What is the outlook for the second half?
The U.S. economy continues to look strong. GDP is estimated to grow at a pace of 4% for the 2nd quarter. Corporate earnings continue to be robust. Spending on factories, equipment, and capital goods is up 24% year-over-year and hourly wages for non-managers is rising at the fastest pace in over nine years. Outside an exogenous shock, a recession looks unlikely right now.
The Fed has signaled that they will continue to raise rates against an improving economy. While this is normally a market headwind, what is going largely unrecognized is the low level at which they project to end the rate hikes. Also, the Fed has recently brought up concerns about the flattening of the yield curve. They would pause the rate hikes if it appears that the yield curve was nearing inversion. Our view is that a Fed misstep would occur if the Fed raises rates took quickly, but it appears that the new Fed leadership is aware of this risk and willing to address.
Markets hate uncertainty and the tariff discussions along with the upcoming mid-term elections bring much of it. Up to this point the tariff rhetoric, as harmful as it might appear, has not reached a level to where it could cause permanent damage to the global markets. Conversely a resolution, no mater how superfluous, could have a rallying effect in the markets. We will continue to monitor the escalation and the impact it could have to the markets today and over the long term.
The mid-term elections are likely to become very heated as the battle lines have been drawn. Historically markets have done well under different Congress/Executive party compositions. Usually, the uncertainty and the anticipation of changes to the party mix have caused more market anxiety. There have been discussions of a tax cut 2.0 focusing more on the individual (versus the prior which was more corporate focused) and the anticipation of this legislation could provide another short-term boost to the equity markets.
We remain overall optimistic about markets given the momentum in the economy and strong earnings growth, however we do not take these risks lightly and will be monitoring developments closely and if necessary, taking appropriate actions to protect portfolios.
Thank you for your trust.
The Vigilare Wealth Management Team
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