Second Quarter 2018 Commentary

Trump Bump Down to a Nudge?

The first half of 2018 has been anything but boring, although the markets have yielded the investor very little. Literally, with all the wild moves of several hundred points in a day, the first half has returned just 2.65% for the S&P 500, while the Dow Jones Industrial Average was down 0.73%.

The big winners of the first two quarters would be oil stocks, with technology a possible second, again due to the F.A.N.G. stocks (Facebook, Apple, Netflix, and Google). By comparison, the small and mid-cap stocks have enjoyed a much more positive move for the same time period. The reason for this divergence is that the tax cuts have proven more helpful to the little guy, and most of these companies are not exposed to trade worries. Conversely, the big losers were the industrials and the banks.

The reasoning is simple, the industrials have exposure to China and oversees currency risk, as well as trade war risk. The financials in general came down in the first half of the year due to a flattening yield curve. The thinking is that if the spread decreases between the banks’ borrowing rate and the consumer loan rate, the banks will be hurt by the flattening yield curve. Finally, the yield curve flattening is one step away from it actually inverting. An inverted yield curve has often been the signal of a shortly ensuing recession.

Having hopefully dispensed with all the bad news, here is the good news: first, unemployment is approximately 3.8% which is a historic low. Interest rates have not skyrocketed, and our Fed has taken measures to insure against this occurrence by raising short term rates. Companies are reporting excellent year over year operating results, and the economy is chugging along. The consumer has been doing their part, and we perceive ourselves to be more secure today from domestic terror related events.

With all of this being said, the second half of the year seems to be setting up in a similar fashion to the first half. Some catalysts for future volatility might be the mid-term elections in November, with the appointment of a Trump appointed Supreme Court justice hanging in the balance. Additionally, some of the bad actors, such as China, Russia, and North Korea still present unknowns in relation to NATO and trade talks.

We find ourselves asking, “what to do now?” For the most part, we believe very little. If you are happy with your allocation to stocks and cash, stay put. If you have more cash to put to work, we suggest averaging into the markets at this point. In other words, now is a time to be very slow to act. If we get a decent pullback in the Fall, we might take a look at some of our quality favorites. Otherwise, our suggestion is to stay invested and try to turn off CNBC as much as possible.

Once we get the sand out of our shoes in September, we will begin to see the formation of a more engaged investment landscape.

A.G. Campbell Advisory, LLC

Mark Scott

A.G. Campbell Advisory, LLC, 1340 Smith Avenue, Suite 200, Baltimore, MD 21209