In the 2nd quarter the global economy continued to expand, with world-wide economic growth accelerating to 4.0%. The leadership of growth shifted back to the U.S., as reflected in individual country stock market results. For the first time in a decade, the unemployment rate dropped below 4%, which is generally considered full employment. Additionally, the U.S. ISM manufacturing index rose in June, to its highest level since 2004. Economic fundamentals remain solid in terms of job growth, manufacturing, and consumer spending. Mean- while, U.S. corporations maintained their strong performance with robust earnings and revenue growth. The impact of the 2017 tax reform bill continues as companies declare plans for their repatriated surplus cash to stock buybacks, dividend increases and other shareholder benefits.
During the first half of the year, the U.S. economy remained in strong growth mode with no threat of recession. As expected, the Federal Reserve implemented a .25% interest rate hike at the meeting on June 13th. For the balance of the year, the Fed has indicated its plan to implement one or two more rate hikes. The 10 year Treasury briefly broke through 3%, to which the markets had a negative response, then quickly settled back into its previous range of 2.75% – 2.85%. The CPI inflation index remained steady, indicating inflation is not a near term threat. The manufacturing index stayed in the high 50’s, which is near historic strength, for most of the 2nd quarter.
The S&P 500 has moved out of the correction phase experienced in February, and remains in a narrow trading range. P/E ratios, which represent relative value to other companies in the same industry, have fallen, which has driv- en stocks to better valuations when over- laid with continued strong earnings results. First quarter corporate earnings reports averaged over 24%, and second quarter earnings are expected to come in at the 20% range. There was slight sector rotation at the end of the quarter, with Technology and Consumer Discretionary leading by double digits, followed by Energy and Health Care producing positive results year-to-date. Energy, in particular, was lifted by stronger crude prices.
Long Term View
In recent trading sessions, the unknown depth and length of trade tensions have added to market volatility. As these issues are resolved, the solid corporate earnings growth is anticipated to support market performance as the 2018 year continues. It is also widely understood the trade imbalances are largely overdue for renegotiation, and there is opportunity for the United States to gain better trade deals with the rest of the world.