Volatility continued in global stock markets during the second quarter. Despite solid first-quarter earnings reports, stocks gained little traction as geopolitical and trade concerns hampered the markets.
In the U.S., growth stocks continued their strong outperformance over value stocks. The market gains this year have been heavily dependent on technology stocks. For the quarter, energy was the best performer (up 13.5%). Oil prices reached their highest level in almost four years as data showed that excess inventory has diminished. Industrials (down 3.2%) were the worst performers as firms dependent on global trade took hits as Chinese and European officials took steps to retaliate against U.S. tariffs on imported goods. Trade concern also extended to Canada and Mexico with the uncertain future of the North American Free Trade Agreement (NAFTA).
Smaller U.S. stocks were a bright spot with quarterly returns of 7.75%. They benefited from reduced international exposure amidst all the trade concerns. They also benefited from the tax cut and a stronger U.S. dollar.
While the stronger dollar helped U.S. stocks, it hurt international and emerging market stocks. International stocks lost around 1% and emerging markets gave up some of their recent gains as they fell over 7%.
The Federal Reserve raised the federal funds rate by 0.25% for the second time this year. They also signaled that they would raise rates at a slightly faster pace with two further rate increases likely this year. The yield on the 10-year Treasury moved above 3% for the first time in over four years, before ending the quarter at 2.85%. Rising rate environments put downward pressure on bond prices, so the overall bond market struggled this quarter, losing 0.16%.
Although there are signs of slowing momentum in the global economy, the fundamentals remain solid. The U.S. economy grew at a 2% rate in the first quarter with business investment offsetting weaker consumer spending. U.S. unemployment at 3.8% is the lowest in years. Inflation is finally starting to pick up. Looking ahead, it appears we are headed into another healthy earnings season.
| Index | 2nd Quarter 2018 | Year-to-date |
| Dow Jones 30 | 1.26% | -0.73% |
| S&P 500 | 3.43% | 2.65% |
| Russell 2000 | 7.75% | 7.66% |
| Bloomberg Barclays U.S. Agg Bond | -0.16% | -1.62% |
| MSCI EAFE Index | -0.97% | -2.37% |
| MSCI EM Index | -7.86% | -6.51% |
Sources: Y Charts and J.P. Morgan Asset Management
Figures as of June 30, 2018. Past performance cannot guarantee future results.
Tags: federal reserve, Market Recap, Stocks, us dollar