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ECONOMIC FLASH – Don’t Dismiss Foreign Markets Quite Yet

July 2018

US Economy: Data softens, inflation perks up.

US Q1 GDP growth was revised down to 2.0% (from 2.2%) on lower consumer spending and weaker US manufacturing activity. Inflation rose at the fastest annual pace (2.8%) in six years.

US Stocks: Tech shakeup on the horizon.

Stocks gained despite concerns over trade policy and geopolitical tension. Tech stocks pared gains (-1.7%); their market leadership could be challenged as S&P 500 Index sectors are restructured this fall.

Foreign Stocks: US dollar a headache.

Returns on non-US stocks continued to slide due to weaker foreign currencies. The US dollar has risen sharply since February along with the perception of US markets as a safe haven should global growth ebb.

Fixed Income: Munis rally, EM debt lags.

As we anticipated, municipal bonds have benefited from constrained supply and strong demand. Meanwhile, all types of emerging market (EM) debt are down so far this year, along with EM equities.

Non-Traditional: Doubt about Bitcoin, other cryptos.

Crypto currencies have suffered steep declines year-to-date over potential regulatory issues. Bitcoin fell to $5,755 before rising back over $6,600 in early July.


Despite some hiccups, we think US GDP growth rebounded strongly in Q2 due to strong consumer spending and rising wages. Additionally, inflation continues to rise modestly, and could accelerate if wide-ranging import tariffs kick in. For these reasons, the Fed will continue to raise interest rates and sell fixed-income assets on its balance sheet.

The underperformance of foreign markets is due mostly to the strength of the US dollar, which we think could prove temporary in light of rising US inflation, deficits, and flattening of the yield curve (short-term rates rising faster than longer-term rates). Consequently, we continue to find that both foreign stocks and bonds present an opportunity for active managers with proven strategies.
Glossary and Disclaimer for Economic Flash

Equities Total Return

U.S. Large Cap 0.6% 2.6% 14.4%
U.S. Small Cap 0.7% 7.7% 17.6%
U.S. Growth 0.9% 7.4% 22.5%
U.S. Value 0.3% (1.2%) 7.2%
Int’l Developed (1.2%) (2.7%) 6.8%
Emerging Markets (4.2%) (6.7%) 8.2%

Fixed Income Total Return

U.S. Agg. Bond (0.1%) (1.6%) (0.4%)
TIPS 0.4% (0.0%) 2.1%
U.S. High Yield 0.3% 0.1% 2.5%
Int’l Developed (0.7%) (0.4%) 3.1%
Emerging Markets (2.4%) (2.7%) 1.0%
Intermediate Munis 0.2% 0.3% 0.2%
Munis Broad Mkt 0.1% (0.3%) 1.7%

Non-Traditional Assets Total Return

Commodities (3.5%) (0.0%) 7.3%
REITs 4.2% 1.3% 4.9%
Hedge Funds
Absolute Return 0.4% 1.0% 3.0%
Overall HF Market (0.3%) (0.9%) 2.5%
Managed Futures (1.1%) (4.8%) 1.1%

Economic Indicators

JUN-18 DEC-17 JUN-17
Equity Volatility 16.1 11.0 11.2
Implied Inflation 2.1% 2.0% 1.7%
Gold Spot $/OZ $1253 $1303 $1242
Oil ($/BBL) $79 $67 $48
U.S. Dollar Index 89.7 88.7 91.7

Our Take