It was anything but smooth sailing, but stock markets ended the second quarter in positive territory and posted their best first half since the dot-com era of the 1990’s. The S&P 500 logged gains of 4% for Q2 and 18% for the first half, and most major indexes broke records set last October. The bull market that began in March of 2009 is now on the cusp of becoming the longest in recorded history.
The outlook was darker in the middle of the quarter as trade tensions simmered between the U.S. and virtually all of its major trading partners. A short list of Trump’s activities in the month of May includes raising tariffs on $200B of Chinese imports from 10% to 25%; threatening 25% tariffs on $325B of additional imports; declaring imported cars from Europe and Japan a threat to national security; and threatening 5% tariffs on all Mexican imports. During this period US stocks lost 7%. Anxiety ran so high that Senate Republicans began openly discussing an override of Trump policy on tariffs for Mexico and formally rescinding his authority to raise tariffs for the purpose of national security. Sensing a backlash, Trump reversed himself on Mexican tariffs in early June and again on Chinese tariffs on June 30.
While stocks markets cheered each time, this kind of impulsive policy-making isn’t exactly conducive to long-term planning. Business investment, which had been accelerating in the wake of the tax cuts that went into effect last year, has since cooled to levels typical during the Obama presidency. Furthermore, even optimists are calling the current situation a truce, not a resolution, suggesting more conflict in the near future. And that’s not all we have to look forward to! If new spending bills are not passed by October 1st, the government will shut down, just as it did in January.
The real economy is already showing signs of weakness with both job growth and manufacturing output slowing. More than half of economists surveyed by Bloomberg expect a recession within two years. It’s not as though investors are oblivious to the situation. An analysis of investment fund flows suggests that the stock market’s strong performance this year seems driven less by enthusiasm for stocks than by a lack of compelling alternatives. Interest rates are once again closer to all-time lows than recent highs, making bonds less appealing. Residential real estate is also cooling off, especially in high tax states that were impacted by the new tax law’s limits on the deductibility of local income and property taxes.
So what should an investor do? Same as always: focus on the long-term, diversify investments broadly, and keep enough money in stable investments like cash and bonds to provide liquidity during a possible sustained drop in stock prices. And brace for more volatility; the next major market move may be just a tweet away.
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