Escalating rhetoric surrounding international trade continued to buffer markets in June, especially those outside of the U.S, as the Trump Administration seeks to remedy what it perceives as unfair trading practices by China and the European Union (EU).
On July 6, the U.S. is expected to impose $50 billion worth of tariffs against imports from China. In turn, the Chinese government has threatened to retaliate with $34 billion worth slapped on U.S. imported goods.
The EU is reportedly ready to hold talks with major automobile manufacturers about a coordinated effort to cut preexisting tariffs as a means of defusing trade tensions before they escalate even further. It remains to be seen how the Trump Administration would react to such efforts. According to the Financial Times, in a preemptive move the European Commission sent a letter to the U.S. Department of Commerce threatening to impose $300 billion in tariffs on U.S. goods if the Administration were to follow through on his threats to place big tariffs on vehicle imports from Europe.
Talks on revisions to the North American Free Trade Agreement (NAFTA) are also ongoing. Additional trade barriers placed on Canada and Mexico could adversely impact the complex supply chains that many companies have come to rely on since the agreement was signed back in 1994.
It is not difficult to see how these growing barriers to the free flow of goods and capital could lead to serious consequences for financial markets. Globalization has been a critical driver of prosperity and the growing wall of tariffs will impede global growth. According to the Tax Foundation, if all tariffs announced by both the
U.S. and foreign jurisdictions were fully enacted, U.S. gross domestic product (GDP) would fall by 0.44% ($110 billion) over the long-run. This would effectively offset about one-quarter of the long-run benefit from the Tax Cuts and Jobs Act that took effect at the beginning of the year.1
Hopefully, cooler heads will prevail in negotiations before things get too far out of hand.
During June, the MSCI EAFE Index of developed international markets and the MSCI Emerging Markets Index fell 1.4% and 4.6% respectively. Through the first half of the year, both indexes have struggled with the rising U.S. dollar, trade issues, and moderating growth. The MSCI EAFE is off 4.5% and the MSCI Emerging Markets off a steeper 7.7%.
The S&P 500 Index did manage to squeeze out a modest gain of 0.5% in June and is now up about 1.7% year-to-date. For the month, 8 of the 11 sectors in the index gained led by Consumer Staples and Real Estate. The Industrials sector dropped 3.4% as many U.S. global multinationals in this sector traded lower on the growing prospects for higher tariffs.
U.S. small-company stocks, as measured by the Russell 2000 Index, rose 0.6% in June and are now up 7% so far this year.
Yet again, growth-style equities outperformed value-style equities in June. The Russell 1000 Growth Index gained about 0.9% in June, ending the first half of the year with an advance of 6.5%. The Russell 1000 Value Index added 0.1%, which brought its year-to-date decline to 2.9%.
Publicly-traded real estate had another great month. The MSCI U.S. REIT Index rose 3.8%, its fourth consecutive monthly increase. The index is now off only 1% year-to-date after being down by as much as 12% at the end of February.
Investors will be focusing attention on the upcoming Q2 earnings season. According to FactSet, the estimated earnings growth rate for the S&P 500 is an impressive 20.0%. If this growth rate stands, it will represent the highest growth rate since the third quarter of 2010 (34.0%). When the quarter began, the estimated growth rate was 18.9%, but five sectors (led by Energy) have enjoyed upward revisions to estimates.
The yield on the benchmark 10-year U.S. Treasury note ended the month at 2.86%, unchanged from the prior month-end but up about 45 basis points (0.45%) since year-end.
Fixed-income markets were mixed in June. The Bloomberg Barclays U.S. Aggregate Index of investment- grade taxable bonds fell slightly by 0.1% and is lower by 1.6% year-to-date. The Bloomberg Barclays U.S. Corporate High-Yield Bond Index gained 0.4% and is now up about 0.2% for the first half of 2018. Tax- exempt issues as measured by the Bloomberg Barclays Municipal Index, gained 0.1% but is lower by 0.25% year-to-date.
Among commodities, West Texas Intermediate crude oil ended June with a sharp increase to $74 a barrel, up from May’s closing price of $67 due to strong global demand and geopolitical influences. Gold closed the month at $1,253.17 per troy ounce, down from $1,298.52 at the end of May.
With respect to central bank action during June, the Federal Reserve’s Open Market Committee (FOMC), as expected, increased the target on the federal funds rate by 0.25% after increasing it by 0.25% back in March. In its quarterly projection and commentary, the FOMC pointed toward two more increases this year. It also said starting in January 2019, news conferences would be held after each FOMC meeting (currently they are held quarterly). The European Central Bank (ECB) said it would end asset purchases this year and would not raise its policy rate until before September 2019. The Bank of Japan kept rates unchanged, as it lowered its inflation outlook.
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S&P 500 Index: A broad based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It is a capitalization-weighted, unmanaged index that is calculated on a total return basis with dividends reinvested. The S&P 500 represents about 75% of the NYSE market capitalizations.
Russell 2000 Index: This index measures the performance approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States.
MSCI Europe, Australasia, and Far East (EAFE) Index: This index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
MSCI Emerging Markets Index: This index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. As of June 2009 the MSCI Emerging Markets Index consisted of the following 22 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
Bloomberg Barclays U.S. Aggregate Bond Index: A market capitalization weighted bond index of investment grade U.S. dollar-denominated fixed-income securities.
Bloomberg Barclays Municipal Bond Index: The Bloomberg Barclays U.S. Municipal Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.
Gold (spot): Gold price per ounce in US Dollars.