These past few weeks have played out like a geopolitical reality TV drama. First, we called off the Iran nuclear deal, then the U.S. summit with North Korea was on … then off and finally on again. Nothing quite like a good old-fashioned exchange of “love letters,” from Washington, D.C. to Pyongyang and back, to recover from a spat. But all’s well that ends well and the initial outcome of the summit looks positive.
On the trade front: At the end of May, the U.S. administration marched forward with plans to impose steel and aluminum tariffs on the European Union, Canada and Mexico, as well as some additional tariffs on China — in return, retaliatory tariffs and threats ensued. Thus far, trade talks and negotiations (including the recent ones at the G-7 summit) haven’t produced a resolution. But what is clear is that when you look at the financial markets, and how they have reacted to all this recent back and forth, the markets don’t seem to believe a trade war is in the cards.
How Have Markets Been Doing?
“Sell in May and go away” is an old trading rule based on a debunked myth that the market underperforms in the six months between May and October. We don’t attempt to predict the future, but you might be thinking that with all of the geopolitical and trade tensions noted above, the rule would have held true this past May. In fact, the opposite was true for the U.S. market, where we saw large-cap stocks up over 2% and small-cap stocks gaining 5%.1 Additionally, the volatility we experienced earlier in 2018 has been in check.
The numbers on our economic front continue to be very strong. Revised first-quarter GDP growth numbers were a shade lower than initial estimates but still robust, and second-quarter GDP growth estimates are well above 3%.2 Jobs numbers released for May showed that unemployment (at 3.8%) is at a multi-decade low. Finally, on the earnings front, almost all S&P 500 companies have reported their results, and earnings growth has averaged +24.4% and revenue is up +8.7%!
It Can’t All Be Rosy
Recently, emerging markets have hit a rough patch on both the equity and debt sides, following stellar performance in 2017. This is in large part due to currency weakness relative to the dollar. The strength in the U.S. economy and rising interest rates are driving up the dollar, which has hurt emerging-market and developed-market currencies.
Poor performance in some segments of the market is a normal part of investing, and we anticipate it when constructing our client portfolios. Not every asset class behaves well in each environment, and while we don’t predict which asset class will underperform in a particular quarter or how geopolitical events will impact markets, we do build diversified portfolios that can endure through different market cycles. In addition, we take into account the volatility and risk associated with an asset class such as emerging markets to ensure the allocation is appropriate given the risk profile of the segment.
As you’re watching political events unfold, you may find that your emotions run high, maybe more so than they do when you watch the characters of your favorite reality TV drama. It can be difficult to resist the urge to react, but if your portfolio is based on decades of research across markets that have withstood a multitude of environments and political scenarios you might just rest a bit easier.
Return data represent past performance and are not indicative of future results. Historical returns of indices do not reflect applicable transaction, management or other applicable fees, the incurrence of which would decrease historical performance results. Index information has been compiled by Wipfli Financial from sources Wipfli Financial deems reliable, but has not been independently audited or verified. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only.