ECONOMIC FLASH: The Threat of Rising Interest Rates
US equities could continue to rise in 2018 on big earnings gains vs. 2017, plus a near-term rebound in economic growth. A major concern: the potential for rising interest rates as the Federal Reserve tries to fend off the inflationary effects of a tight labor market amid an expanding economy.
May 2018
US Economy: Slowdown likely temporary.
US GDP growth slowed in Q1 2018 to 2.3%, from around 3% in the previous two quarters, as weaker business spending and winter weather took their toll. However, early economic data for Q2 suggest a short-lived slowdown.
US Stocks: Struggling to hold on to gains.
With more than half of S&P 500 companies reporting, Q1 earnings are beating analyst estimates by nearly 7%. Stock prices, still slightly down for the year, rose mildly relative to earnings.
Foreign Stocks: Slide in Emerging Markets (EM).
Returns on EM equities trailed as the US dollar strengthened. EM stocks were also hurt by a pullback in the tech sector, which is a growing part of many EM economies.
Fixed Income: Treasury yields up again.
The benchmark 10-year Treasury yield at one point surpassed 3% in April, as bond investors focus on inflation and rising US deficit.
Non-Traditional: Real assets outperform.
Concern about trade wars and geopolitical conflict lifted oil and aluminum prices. Infrastructure assets with inflation-insulated income, such as utilities, added value to portfolios.
THE TAKEAWAY
While much of the benefit of corporate tax cuts is likely reflected in US stock prices, we think US equities could continue to rise in 2018 on big earnings gains vs. 2017, plus a rebound in economic growth in Q2. The major cloud on the horizon: the potential for rising interest rates as the Federal Reserve tries to fend off the inflationary effects of a tight labor market amid an expanding economy.
Outside the US, we continue to find emerging markets attractive, despite challenges from a stronger US dollar and higher interest rates. Thoughtful, active management can uncover opportunities in countries that are growing faster than the US, where creditworthiness continues to improve and stock market valuations are not as high.
Glossary and Disclaimer for Economic Flash
Equities Total Return
| APR | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | 0.4% | (0.4%) | 13.3% |
| U.S. Small Cap | 0.9% | 0.8% | 11.5% |
| U.S. Growth | 0.3% | 1.8% | 18.8% |
| U.S. Value | 0.4% | (2.4%) | 7.4% |
| Int’l Developed | 2.3% | 0.7% | 14.5% |
| Emerging Markets | (0.4%) | 1.0% | 21.7% |
Fixed Income Total Return
| APR | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | (0.7%) | (2.2%) | (0.3%) |
| TIPS | (0.1%) | (0.8%) | 0.3% |
| U.S. High Yield | 0.7% | (0.2%) | 3.2% |
| Int’l Developed | (2.5%) | 2.0% | 7.0% |
| Emerging Markets | (1.4%) | 1.8% | 7.7% |
| Tax-Exempt | |||
| Intermediate Munis | (0.4%) | (1.0%) | (0.5%) |
| Munis Broad Mkt | (0.4%) | (1.5%) | 1.7% |
Non-Traditional Assets Total Return
| APR | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 2.6% | 2.2% | 8.0% |
| REITs | 0.5% | (6.2%) | (1.0%) |
| Hedge Funds | |||
| Absolute Return | 0.1% | 0.4% | 2.8% |
| Overall HF Market | 0.1% | (0.9%) | 2.9% |
| Managed Futures | 0.1% | (2.8%) | (0.3%) |
Economic Indicators
| APR-18 | SEP-17 | MAR-17 | |
|---|---|---|---|
| Equity Volatility | 15.9 | 10.2 | 10.8 |
| Implied Inflation | 2.2% | 1.9% | 1.9% |
| Gold Spot $/OZ | $1315 | $1271 | $1268 |
| Oil ($/BBL) | $75 | $61 | $52 |
| U.S. Dollar Index | 86.3 | 88.7 | 93.9 |
