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ECONOMIC FLASH – US Economy Chugs Along, Despite Trade Tensions

October 2018

US Economy: Jobs and growth on track.

The US trade deficit widened as global trade weakened and the trade dispute between China and the US escalated. Meanwhile, the labor market remained strong with unemployment falling to 3.7%.

US Stocks: Small-cap stocks stumble.

Small-cap stocks, generally thought to be insulated from trade disputes because of their domestic focus, fell in Sept. as investors grew more cautious on valuations and the potential impact of US import tariffs.

Foreign Stocks: European equities falter.

European stocks rebounded most of September but fell at month-end as Italy’s proposed new budget indicated a deficit whose size contradicts guidelines set by the European Union.

Fixed Income: Round III for the Fed.

The Federal Reserve hiked its target interest rate for the 3rd time in 2018, citing the prospect of at least three more years of US economic growth. The yield on 10-year Treasuries rose to just under 3.1%, up 0.6% so far this year.

Real Assets: Commodities turn positive.

Oil futures (+5.1%) continued to lead commodities markets, while other contracts including corn (+1.6%) and soybeans (+1.4%) rebounded on strong export demand.

Alternatives: A muted September.

Hedge funds continued to lag traditional asset classes in September as the low level of market volatility offered fewer trading opportunities. Managed futures especially struggled to benefit from current market trends.

Equities Total Return

U.S. Large Cap 0.6% 10.6% 17.9%
U.S. Small Cap (2.4%) 11.5% 15.2%
U.S. Growth 0.3% 17.0% 25.9%
U.S. Value (0.0%) 4.2% 9.4%
Int’l Developed 0.9% (1.4%) 2.7%
Emerging Markets (0.5%) (7.7%) (0.8%)

Fixed Income Total Return

U.S. Agg. Bond (0.6%) (1.6%) (1.2%)
TIPS (1.1%) (0.8%) 0.4%
U.S. High Yield 0.5% 2.5% 2.9%
Int’l Developed (1.4%) (2.9%) (1.6%)
Emerging Markets 0.1% (4.5%) (2.9%)
Intermediate Munis (0.5%) 0.2% (0.6%)
Munis Broad Mkt (0.7%) (0.5%) 0.2%

Non-Traditional Assets Total Return

Commodities 1.9% (2.0%) 2.6%
REITs (2.4%) 1.8% 4.3%
Hedge Funds
Absolute Return (0.4%) 1.0% 1.1%
Overall HF Market (0.7%) (1.2%) 0.3%
Managed Futures (0.7%) (3.5%) 1.7%

Economic Indicators

SEPT-18 MAR-18 SEPT-17
Equity Volatility 12.1 20.0 9.5
Implied Inflation 2.1% 2.1% 1.9%
Gold Spot $/OZ $1193 $1325 $1280
Oil ($/BBL) $83 $70 $58
U.S. Dollar Index 90.1 86.2 87.1

Our Take

US GDP growth for 3rd quarter 2018 is likely to remain closer to 3% (higher than the 2.5% average since the 2008 recession), although this will be hampered by the impact of trade tariffs and Hurricane Florence. Any drop in the growth from the 2nd quarter’s 4.1% result shouldn’t be seen as the start of an economic slowdown, since the bulk of the data continue to indicate that the US economy is on stable footing.

As investors have sought out the relative safety and/or growth of US stocks and bonds so far this year, most other markets have underperformed, including foreign stocks and bonds, commodities and real estate, and alternative assets. While we firmly believe in the long-term benefits of a globally diversified portfolio, now might be a good time for investors to consider tax-loss harvesting – realizing losses on certain assets (while replacing them with similar holdings) and using the losses to offset current and future gains.

In fixed income, we believe the Fed will continue to raise interest rates, and that investors are not yet fully appreciating the impact rising rates will have on the financial markets. We are focusing on fixed-income strategies that have less sensitivity to interest rates and slightly more exposure to credit risk.

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