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Aug 09, 2018

Market Commentary: July's Evolving Trade War and Its Effects on Financial Markets

By Kara Murphy, CFA® Chief Investment Officer

After four weeks of thoroughly entertaining soccer, the FIFA World Cup reached a dramatic conclusion in July. The level of excitement was second only to the spectacle of the evolving trade war and its effects on financial markets.

As the U.S. and its trading partners went back and forth on tariffs covering everything from tractors to nuclear reactors, the global equity markets reacted. Between the various retaliatory announcements, thankfully, the impressive strength of corporate earnings buoyed the markets, leading to encouraging returns for July.

July Return YTD Return
S&P 500 3.7% 6.5%
Russell 2000 1.7% 9.5%
MSCI EAFE (Europe, Asia and Far East) 2.7% 0.2%
MSCI EM (Emerging Markets) 2.5% -4.3%
Gold -2.3% -6.0%

Source: Bloomberg. Indexes are total return.

U.S. Equity Markets:

U.S. equity Markets resumed their upward trend in July, with large cap doing the bulk of the lifting. The large-cap equity Standard & Poor’s 500 Index returned 3.7% for the month and a solid 6.5% for the year to date. Despite the relative underperformance of small caps in July, the Russell 2000 Index continues to lead on a year-to-date basis with gains of almost 10%. Smaller companies, which tend to have less international exposure than their larger counterparts, are typically less impacted by rising tariffs and a stronger dollar.

GICS Sectors Level
Source: Bloomberg, S&P 500 GICS Sectors Level-1

On a sector basis, Industrials and Health Care led the market in July with returns of 7.3% and 6.6%,

respectively. Over the course of the year, however, the Consumer Discretionary and Technology sectors continue to dominate. Thus far in 2018, those two sectors have both posted returns above 13%.

Consumer Discretionary stocks have benefited from a happy, employed consumer. Jobs are plentiful, and manufacturing jobs are increasing at the fastest pace since the 1990s. While wages are picking up, they are not yet stoking inflation. Not surprisingly, consumer confidence is high. One note of caution is higher oil prices, which can create a drag on consumer spending.

Despite lagging somewhat in July, technology stocks continue to dominate the headlines. It is easy to forget how far the Technology sector has come. After peaking in early 2000, the tech-heavy Nasdaq took over 13 years to retake that level. Since then, the sector has nearly doubled, led by innovation and an impressive level of free cash flow. In July, we witnessed a few chinks in the tech armor after a couple of high-profile companies reported disappointing earnings. At the same time, Apple, already the largest company in the world by market cap, flirted with a trillion-dollar market valuation.

Fixed Income:
July Return YTD Return
US Fixed Income Aggregate -0.1% -1.7%
1-3 Year Treasury 0.0% 0.0%
5-7 Year Treasury -0.4% -1.7%
10-20 Year Treasury -0.9% -3.5%
Municipal Bonds 0.3% 0.0%
Corporate Bonds 0.8% -2.5%
High Yield Bonds 1.1% 1.3%

Source: Bloomberg. Total returns based on Bloomberg Barclays indexes.

Bonds continue to face broad-based challenges. The Bloomberg Barclays US Aggregate Bond Index returned -0.1% in July and -1.7% in 2018. Treasury yields were up in July, particularly for longer-dated bonds, and are well off their lows of September 2017. At the same time, credit spreads generally declined, indicating that the market is less concerned about corporate credit.


As trade tensions remain acute and as central banks turn from easing to incrementally tighter policy, the strength of corporate earnings will become increasingly important to global equity markets. Fiscal stimulus will likely continue to boost U.S. growth in the months ahead, which in turn may help keep corporate earnings well supported. With that said, we’re fast approaching record-breaking territory: This is the longest expansion since such things were recorded. Given that fact, we feel confident in suggesting that we’re closer to the end of this economic cycle than we are to the beginning. And while no one can accurately predict when an expansion ends, we’re diligently looking for signs of the slowing business cycle, which have historically been preceded by imbalances in consumption, capital expenditures, or investment. For now, though, we’re basking in the afterglow of the World Cup and pondering how the global economic landscape and financial markets might look in four years’ time.

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