The U.S. stock market pushed slightly higher during the second quarter of 2018. Consumer and business confidence, strong economic data, and earnings growth continued to boost the market.  However, gains were tempered by recent developments in Washington. Trade concerns and geopolitical risks caused uncertainty which lead to volatility in the stock market.

The current economic outlook remains positive, supported by the accelerating U.S. economy, U.S. consumer spending, and low unemployment. Job growth accelerated in May and the unemployment rate fell to 3.8%, indicating a strong economy and tight labor market. Wage growth remains low, but more recently has shown some improvement as employers are forced to increase wages to retain or attract employees.

The solid economic activity and low unemployment has encouraged the U.S. Federal Reserve to continue raising interest rates. The Fed increased rates again in June and expect to raise rates another two times before the end of the year. Fed Chairman Powell continues to take a hawkish stance as the unemployment rate falls and the economy strengthens. Inflation remains low, but has recently come under some upward pressure.

We remain optimistic on U.S. equities, as corporations benefit from the 2017 tax-reform and robust consumer spending. Productivity has strengthened and retail sales increased, pushing the U.S. GDP higher. We believe earnings growth will continue in the second half of the year. In addition, an increasing number of mergers and acquisitions have developed recently as companies use their cash piles and tax savings to increase capital spending and fund new opportunities. AT&T was recently approved to acquire Time Warner by the DOJ, a deal that will be remembered for years to come. The media landscape continues to change rapidly as Comcast and Disney battle over acquiring 21st Century Fox.  In our opinion, the wave of mergers and acquisitions will spread to other industries as capital remains historically cheap and easing regulations are supporting mergers.

A couple of areas of emphasis are the consumer discretionary, energy and technology sectors fueled by the momentum of the strong economy and consumer spending. In addition, we continue to believe rising interest rates will positively impact the financial sector.

Despite the strong U.S. economy, trade tensions persist and geopolitical issues remain on the horizon. The Trump-Kim summit in June was monumental and reduced some geopolitical concerns as the two agreed to work together to end North Korea’s nuclear program. In more recent news, trade concerns have ramped up, specifically with China and Canada. We believe Trump continues to use trade tariffs as a negotiation tool with foreign countries. However, if the trade rhetoric continues, it will negativity affect economic growth and become a drag on corporate earnings.

Despite the volatility, geopolitical risks, and trade concerns, we remain cautiously optimistic for investors in the equity markets for the balance of the year. We believe the healthy economy combined with consumer confidence will be the defining force in the second half of 2018.

As always, please don’t hesitate to give us a call with any questions.