Domestic investors are facing two distinct periods of uncertainty: now through Labor Day (September 3) and Labor Day until the midterm elections (November 6). Ed Mills, Raymond James Washington policy analyst, expects the first period is likely to see elevated activity with the Mueller investigation, continued trade-related escalations, and increased geopolitical headlines. As Washington, D.C., works through these issues, he is concerned about the binary nature of these fights teetering between potentially, extremely positive and negative outcomes.
Key flashpoints on trade matters over the next several weeks could see the negatives of Chinese tariffs and investment restrictions and/or the positives of a possible NAFTA breakthrough with Mexico, and possible tariffs on imported cars moving toward resolution. The upcoming midterm elections combined with the possible late-summer wrap-up of the special counsel investigation could also contribute to potential uncertainty, Mills said.
Meanwhile, second-quarter gross domestic product (i.e., the growth of the U.S. economy) was reported in line with estimates at 4.1%, the strongest quarterly growth in four years. This is only the fifth time since the credit crisis that quarterly growth exceeded 4%, noted Raymond James Senior Equity Portfolio Analyst, Joey Madere.
Despite the various headline news, all the major domestic stock indices were up for the month of July. Year-to-date performance was also positive as shown below, although the global MSCI EAFE index (international stocks) and Bloomberg Barclays U.S. Aggregate Bond index each slid almost 2%. International stocks have backed off in 2018 due to both heated trade rhetoric and the strong U.S. dollar. If trade issues are resolved, we may see a strong bounce back in international stocks. Bonds continue to be important to portfolio downside protection due to their lower volatility and regular interest payments. In addition, yields on many short-term bonds have now risen to the point where those yields have largely offset the investment losses we have seen this year.