We will have to wait and see whether the words were just a brash threat or will lead to serious action. In the meantime, our economy continues its strong pace.
Positive news was plentiful, with crude oil returning to $70 a barrel and housing starts hitting their highest level since 2007. Unemployment in the U.S. dropped to 3.8%, its lowest rate since 2000 and a survey by the New York Fed found that the public expects inflation to be 3% one year from now. The Federal Reserve reacted to all of this news by increasing interest rates and upping their projections for the rest of the year (more about this in our bond discussion). Corporate earnings were also robust as companies announced record levels of stock buybacks.
But, also as the chart shows, the bright lights of great performance began to dim at the end of June as President Trump increased his tariff threats. As a result, large U.S. companies with lots of business abroad began to lose some value. Meanwhile, smaller companies whose sales are mostly domestic, had one of their best quarters ever. The Russell 2000 Index, which represents the performance of smaller U.S. companies, hit all-time highs and returned 7.75% in Q2. For perspective, the Russell 1000 Index, which represents larger companies in the U.S. returned 3.57% in Q2.
A high point for U.S. equities was also the performance Real Estate Investment Trusts, returning almost 10% for the quarter. This was quite a change from the prior twelve month’s return of less than 2%. This supports our view that REITs are an important diversifier in portfolios, although their challenges continue in the short-term as interest rates increase.
As we look forward, the big question on the market’s mind is where the talk about tariffs will finally settle. The financial press is generally biased toward free trade because of the economic argument that countries who produce the best goods at the best price should be able to do so. Those goods tend to raise the standard of living around the globe (if iPhones were manufactured where it is more expensive to do so, fewer consumers would be able to afford them).
The other side of the trade coin is that producing goods in other countries displaces workers. The tariff battle is a classic economic conflict pitting consumers against workers. The long-term trend tends to favor the fact that there are more consumers than there are workers, but we will have to wait and see what develops in the short-term.