As markets welcome Summer, US stocks demonstrated marked stability during the second quarter compared to earlier in the year. This was despite rising trade tensions as President Trump sought to improve the United States’ global trade stance through various and escalating tariff threats.

US large-caps were modestly higher, with the S&P 500 Index finishing the first half up +2.5% (‘SPY’ ETF Proxy*). Bullishly, small-cap, growth and technology issues performed better still. In each case the impact of trade relations and rising interest rates is seen as relatively lower. In comparison, industrial and materials stocks, the target of initial tariffs, struggled for a divided market sector-wise. Likewise, as international monetary policy discrepancies widened, a strengthened US Dollar left developed overseas stocks sideways, and emerging market stocks relatively worse off as they fought a simultaneous battle against higher borrowing costs and significant trade imbalances.

Late in the quarter, the US Federal Open Market Committee (‘FOMC’) indicated it would raise rates four times this year rather than the initial three in response to persistent economic strength. Thus, bonds continued their struggle against rising rates. Some analysts are concerned about the increasing flatness of the duration curve (the plot of interest rates at different maturities), which often precedes recession. However, this danger is difficult to assess due to overseas lending where negative rates continue to support excess US demand, keeping rates artificially low. Rate sensitive global real estate faced similar headwinds, while commodities were an area of strength, albeit along a rocky path.

Despite the tough trade talk, and unlike the pattern witnessed in the first quarter, daily news flow had somewhat less of a day-to-day impact on markets versus the narrative of underlying domestic economic strength. The June labor report, for example, offered a 93rd month of consecutive growth, the longest positive streak in history (Schwab Newsroom, “Milemarker 92”, 6/4/18). Meanwhile, Gross Domestic Product (‘GDP’) estimates for Q2 are projected at a robust +3.8% (The Federal Reserve Bank of Atlanta, Press Release, 7/6/18). However, current estimates are for up to a -0.5% negative impact on forward US GDP by tariffs (Tax Foundation, “Tracking the Economic Impact of Tariff Actions,” 6/22/18) depending on the degree to which they are ultimately enacted.

At the end of the day, volatility subsided substantially during the quarter with the VIX options volatility index falling back well into the low- to mid-teens. We will see where the trade wars take markets, but for now, The Encompass Portfolios are more normally invested into July, excepting protective cash held for overseas and fixed income positions based on their relatively weaker trends.

* Not Individual Investment Advice; Dividend-adjusted proxy ETP data from Commodity Systems, Inc. & Allocations as of June 30, 2018.