Moderation and Manufacturing

Five months into the year, the U.S. economic outlook remains moderate. While growth appears to have improved in recent months (following a weak showing from consumers in the first quarter), the labor market has grown tighter and could limit growth. Interest rate hikes and trade tensions are also a concern.

 
 

The major indices have produced a mixed result year to date. Of course, we continue to monitor the global markets on your behalf and adjust your portfolio accordingly.

Here is a look at what’s happening in the economy and capital markets, as well as key factors we are watching:

Equities (stocks)

  • Higher oil prices could hamper fiscal stimulus in the U.S. as tax cut savings may go to higher energy costs.

  • Earnings growth continues to be the strongest in the U.S., although it has been positive around the world as well.

Fixed income (bonds)

  • While rising interest rates will likely make bonds more productive over the longer-term, in the shorter-term they tend to depress bond values a bit. As suitable, we’ve already allocated your portfolio to help reduce that short-term effect.

International

  • European growth was subpar in the first quarter. More importantly, political turmoil in Italy has renewed concerns about whether the country may exit the monetary union – and Spain appears to be experiencing its own populist revolt.

  • Both European stock markets and the euro lagged in May as Italy’s election and governmental issues played out. Geopolitical tensions throughout Europe place heightened pressure on the upcoming summit of European leaders, which aims to provide guidance, vision and inspiration to regional investors and consumers.

  • More mainstream emerging markets were able to shake off that pressure, as ongoing trade discussions between the United States and China seemed to be heading in a positive direction.

Bottom line

  • U.S. stocks, as represented by the S&P 500, have moved higher on strong earnings growth, aided by U.S. tax reform. This is despite the headwinds of rising oil costs, the potential for rising wages, and higher interest rates.

  • Global economies show signs of a soft patch, which could be temporary.

  • Bonds are in transition to a higher interest rate structure. Along the way, some types of bonds may experience modest volatility – and, as suitable, we have incorporated strategies to help defend against that.

As you might expect, we will continue to monitor the U.S. and global economies for opportunities – both for potential return and risk management – on your behalf.

As always, please let us know your questions or comments.

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Definitions:

The S&P 500 is an unmanaged index of 500 widely held U.S. stocks.

The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market.

The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market.