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ECONOMIC FLASH – Key Concerns: Trade War, Higher Interest Rates

June 2018

US Economy: Job market strong, inflation tame.

US non-farm payrolls rose by 223,000 in May, reducing the unemployment rate to just 3.8%, a low level seldom seen (only in 2000 and 1969). Core inflation remained just below the long-term Fed target of 2%.

US Stocks: Growth over value.

Mainly because of tech stocks (+8.2% in May), growth outperformed value. Small-cap stocks also surged: tax cuts are boosting profits more than at larger firms; and lower exposure to foreign markets.

Foreign Stocks: A tough May.

Uncertainty about Italy’s new populist government, a weaker euro, and the threat of a trade war with the US all weighed on international equity markets.

Fixed Income: Yields swoon.

US 10-Yr. Treasury yields fell to 2.8% before rebounding on fears about Italy breaking with the Eurozone and the Fed being too aggressive in raising US interest rates.

Non-Traditional: Oil at 2014 levels.

The price of oil rose to more than $77/barrel on a continued slowdown in production and possibly new sanctions against Venezuela.


US wage growth (+2.7%) and retail sales (+4.7%) in May suggest economic growth in Q2 will surprise on the upside. A tight labor market makes it more likely that inflation will begin to rise faster than 2% annually, providing cause for the Federal Reserve to continue raising interest rates. We expect a rate increase mid-June and at least one more by year-end.

Non-US equity markets have stumbled recently as investors assess the impact of trade wars and a less unified European Union. We believe this downturn is temporary. Even if higher volatility continues, the valuations and growth prospects in many foreign markets are attractive relative to the US and support strategic overseas investments.
Glossary and Disclaimer for Economic Flash

Equities Total Return

U.S. Large Cap 2.4% 2.0% 14.4%
U.S. Small Cap 6.1% 6.9% 20.8%
U.S. Growth 4.5% 6.4% 21.3%
U.S. Value 1.0% (1.4%) 8.8%
Int’l Developed (2.2%) (1.5%) 8.0%
Emerging Markets (3.5%) (2.6%) 14.0%

Fixed Income Total Return

U.S. Agg. Bond 0.7% (1.5%) (0.4%)
TIPS 0.4% (0.4%) 0.7%
U.S. High Yield (0.0%) (0.3%) 2.3%
Int’l Developed (1.6%) 0.3% 3.3%
Emerging Markets (2.0%) (0.3%) 4.4%
Intermediate Munis 1.0% 0.0% (0.5%)
Munis Broad Mkt 1.2% (0.4%) 1.3%

Non-Traditional Assets Total Return

Commodities 1.4% 3.6% 11.0%
REITs 3.6% (2.8%) 2.7%
Hedge Funds
Absolute Return 0.5% 0.8% 2.9%
Overall HF Market 0.3% (0.7%) 2.9%
Managed Futures (2.4%) (5.1%) (2.7%)

Economic Indicators

MAY-18 NOV-17 MAY-17
Equity Volatility 15.4 11.3 10.4
Implied Inflation 2.1% 1.9% 1.8%
Gold Spot $/OZ $1299 $1275 $1269
Oil ($/BBL) $78 $64 $50
U.S. Dollar Index 88.6 89.2 93.1

Our Take