Investor Sentiment is less bullish but not yet bearish (7 on a scale of 10, with 10 being the most bullish). Europe has become strikingly out of favor over the last few months and Technology remains the preferred sector though optimism towards FAANG has moderated slightly. A majority of investors are betting on 2 more hikes this year and a year- end 10-year yield around 3%. Trade dominates the list of concerns and long USD is a widely held view.
The NASDAQ and Growth indices outperformance YTD is attributable to large allocations to Tech and Discretionary, the two best performing sectors this year. The strong performance of the Russell 2000 suggests that investors see small-caps as less susceptible to trade issues. Easy monetary policy has benefited unprofitable companies, allowing the stocks to keep pace with their profitable peers. Further down the cap spectrum, the performance differential is much greater between earners and non-earners. Rate normalization should lead to further dispersion between quality and speculative securities and benefit active managers.
The major indices continued to decline last week as trade and other geopolitical headlines dominated investor sentiment. For the week, the Russell 2000® Index led the decline with a 2.52% drop, followed closely by Nasdaq Composite’s 2.37% decline; the S&P 500® Index fell 1.33% and the Dow Jones Industrial Index’s lost 1.26%. For the first six months of 2018, the Nasdaq and the Russell 2000® outperformed; investors have favored these indices on the expectation that companies in these indices offer greater economic growth and less exposure to the tariffs that threaten trade with China, Europe, Canada and Mexico. The markets seem to anticipate negotiated agreements; still, the timing and magnitude of actual tariffs, some scheduled to take effect next week, are uncertain. Tariffs could dampen worldwide economic growth which is currently the strongest since the “Great Recession.” This week, the Shanghai stock market fell into bear market territory (‑13.9% year-to-date) as investors feared the potential impact of the threatened trade policies. The specter of negative impacts to global trade should motivate government leaders to resolve these tariff disputes. Meanwhile, European Union leaders reached a shared, but voluntary, agreement on migration; the deal lessened fears that German Chancellor Merkel’s coalition government might fail.
Trade-related headlines dominated corporate headlines: Walt Disney received preliminary Dept. of Justice approval to proceed with the purchase of Twentieth Century Fox’s assets, with several anticipated stipulations. Amazon announced the purchase of on-line pharmacy start-up Pillpack, which focuses on customers who take multiple daily medicines. The purchase immediately impacted pharmacy service providers even though its potential impact on the pharmacy business is uncertain due to the complexities of dispensing medications. Nike stock soared 11.13% on Friday, handily beating analyst estimates, and announced a $15 billion stock repurchase program. The gains for Energy stocks continued as oil prices rose above $74 for the first time since November 2014. The price rise is due, in part, to capacity constraints among OPEC member countries Libya, Venezuela and Nigeria; and, the U.S. decision to withdraw from the Iran Nuclear Agreement will severely impact Iran’s ability to export oil. Worldwide oil supplies are currently near or below their five-year average; any further disturbance has the potential to create oil shortages in the near to intermediate term.
Year-to-date, all of the major indices, except the Dow, gained. Heading into July, investors will turn their attention from headline news to second quarter earnings results. Companies will likely provide more detail on the success of their growth initiatives and discuss anticipated changes in light of the threatened trade tariffs. Investors will pay particular attention to management outlooks for the remainder of the year. The resurgence in energy-related industries will benefit many sectors; and, the continued growth in technology will support the market even though overall growth may be tempered pending clarification on trade issues.
Source: Strategas and Pacific Global Investment Management Company
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
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