Locally based CPA firm since 1956

The Markets – The S&P 500 index finished June positive +1.06% bringing the year-to-date return to +1.67%. The Dow was negative -0.37% for the month and remains in negative territory year-to-date at (1.81%), according to the Wall Street Journal. The bright spot in the markets is the NASDAQ which finished the month +1.54% and year-to-date +8.79%.

A broad economic expansion, strong earnings growth, and a moderate pace of monetary tightening appear to provide a generally favorable environment for global financial markets in the second half of 2018. However, historically high valuations across most asset classes and a range of economic and policy risks—including the threat of trade protectionism and the impact of U.S dollar appreciation on emerging market debtors—create the potential for renewed volatility.

Moving into the second half of 2018, momentum appears to be slowing in Europe and Japan. Until recently, relatively tame inflation has been enabling the U.S. Federal Reserve to pursue a moderate course of rate hikes, but the recent spike in oil prices along with U.S. dollar appreciation creating headwinds for emerging markets, and worries about populist policies contributing to a trade war between the U.S. and China could do significant global economic damage, which may cause the Federal Reserve to pause their planned rate hikes. These same factors could cause volatility and perhaps negativity in the global equity markets.

Simple mathematics suggests that the rate of U.S. earnings growth seen in the first quarter is unlikely to be matched—much less beat—over the remainder of 2018. Consensus estimates indicate that analysts do not expect earnings growth to slow dramatically in the second half, and they appear to anticipate earnings growth in the high single digits in 2019. If met, these forecasts would imply a reasonably constructive environment for equities. However, we are doubtful the analysts fully anticipated the political environment and the damage that could be done via trade wars when providing their estimates earlier this year. We anticipate some adjustments in outlook over the course of the summer.

Washington – As we head into the midterm elections; we encourage everyone to get into the conversation, get informed, and go vote.

The Economy – Stagflation may be the new word this summer: What is stagflation? As defined in the dictionary it is; persistent high inflation combined with high unemployment and stagnant demand in a country’s economy. The most notable time of stagflation in the U.S. was the 1970s. We aren’t calling for that type of stagflation. However, we see rising oil prices, rising tariffs which cause the price of goods to go up, and a labor force participation rate that has remained stubbornly poor, in spite of the lengthy economic recovery since the 2009 recession. We see a path for stagnant demand in the economy, rising costs, and flat to negative employment trends. All of which could be a drag on earnings and subsequently to the equity markets.

A quick note on financial behavior and retirement planning:

According to a survey (https://www.merrilledge.com/report) released by Merrill Edge, an online discount brokerage service provided by Bank of America Merrill Lynch (BAC): One in three Americans state their financial stability is dependent on receiving an inheritance. The key to their financial future may lie in their parents’ bank account. Some 36% of Generation X-ers and 32% of millennials and 20% of baby boomers say they’re relying on their family fortunes.

For Generation Z, which is aged 18 to 22, this number jumps to 63%, despite 87% describing their approach to financial decisions as “do-it-myself.” Planning ahead is smart, but relying on money that may never materialize is not, said Aron Levine, head of Merrill Edge. “We’ve never seen such a strong reliance on receiving an inheritance,” he said.

 

Have a question? Let me know! Email me at kcompton@wsmtexas.com.