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ECONOMIC FLASH – Is Ramped Up US Growth Sustainable?

August 2018

US Economy: US GDP growth spikes.

As expected, US GDP growth accelerated to 4.1% in the 2nd quarter, fueled by strong consumer spending and exports. US unemployment ticked up to 4% from 3.8%, as workers returned to the labor force. Slower growth is anticipated for the rest of 2018.

US Stocks: Earnings take center stage.

US equity markets shook off trade war concerns as corporate earnings surprised to the upside. Of the small number of S&P 500 companies that have already announced Q2 earnings, 82% have surprised on the upside.

Foreign Stocks: Japan a drag on returns.

Non-US stocks gained but lagged US equity markets. Japan underperformed other major developed markets despite a 6.7% jump in exports, as its central bank discussed plans to pare back monetary stimulus.

Fixed Income: EM debt makes a comeback.

After selling off substantially amid global trade uncertainty, emerging market bonds outperformed in July as investors recognized value relative to other high-yield options.

Non-Traditional: Commodities keep sliding.

Commodity prices generally fell in July. Safe haven metals, such as gold and silver (down 6.5% and 9.3%, respectively) slid despite weakness in the US dollar.


We expect the 2017 tax cuts to continue supporting US GDP growth and corporate earnings through 2018, although Q2’s GDP growth could be the high point for the year. Given strength in the US economy, we think the Fed will continue raising its target interest rate as it reduces the size of its balance sheet.

While a stronger US dollar has hurt returns on foreign stocks and bonds, it has also posed a problem for commodities. We believe commodities are now priced near historical lows relative to equities and warrant a small allocation for several reasons: diversification, a hedge against rising inflation, and the potential for a strong rebound.
Glossary and Disclaimer for Economic Flash

Equities Total Return

U.S. Large Cap 3.7% 6.5% 16.2%
U.S. Small Cap 1.7% 9.5% 18.7%
U.S. Growth 2.8% 10.5% 22.9%
U.S. Value 3.8% 2.6% 9.9%
Int’l Developed 2.5% (0.4%) 6.4%
Emerging Markets 2.2% (4.6%) 4.4%

Fixed Income Total Return

U.S. Agg. Bond 0.0% (1.6%) (0.8%)
TIPS (0.5%) (0.5%) 1.2%
U.S. High Yield 1.1% 1.2% 2.5%
Int’l Developed (0.7%) (1.1%) (0.1%)
Emerging Markets (0.0%) (2.7%) (0.8%)
Intermediate Munis 0.4% 0.7% (0.1%)
Munis Broad Mkt 0.3% (0.0%) 1.2%

Non-Traditional Assets Total Return

Commodities (2.1%) (2.1%) 2.7%
REITs 0.6% 1.9% 4.3%
Hedge Funds
Absolute Return (0.1%) 1.0% 2.5%
Overall HF Market (0.2%) (1.0%) 1.4%
Managed Futures (0.8%) (5.4%) (0.3%)

Economic Indicators

JUN-18 DEC-17 JUN-17
Equity Volatility 12.8 13.5 10.3
Implied Inflation 2.1% 2.1% 1.8%
Gold Spot $/OZ $1224 $1345 $1269
Oil ($/BBL) $74 $69 $53
U.S. Dollar Index 90.1 86.3 89.5