Hard to believe that we are nearly half way through 2018. School is out, and most people’s thoughts are on a well-earned vacation. Catchy summertime songs fill our heads with thoughts of simple, care-free days. Then, as providence would have it, a few well-placed, albeit ill-timed news stories hit to bring us crashing back to reality. As we wrote last month, investors still seem to be in search of the “other shoe”, waiting anxiously for it to drop. The latest culprit of market volatility appears to be Italy. With its new government now in place, Italy has begun to talk of tax reform, deportation of illegal immigrants, and exiting the European Union. Think Greece from a few years ago, only Italy is the 3rd largest economy in the EU, and as we all know, Italians are far better dressers. Equity markets wavered around the Memorial Day holiday, as markets digested the potential effects of an Italian exit from the EU, but since then US equities have resumed their recent upward trend.
Here at home, trade negotiations and tariffs continue to dominate the headlines. China appears to be the main target, although Mexico, Canada and the EU are also feeling the pressure. All parties involved have threated retaliatory sanctions in kind, which has certainly kept investors busy trying to determine the consequences.
So, are the “Tariff Talks” news or noise? Are these simply negotiation tactics between the global government heavy-weights that are being played out through the media? Only time will tell. We certainly see markets react to the news of the day, especially if the news is negative. For the year there have been more outflows from equity funds than inflows, as investor are trying to stay ahead of any significant downturn. But recent downward moves, while troublesome, continue to be short lived and have usually reversed in short order.
Regardless of whether it is news or noise, it is hard to overlook that the economics continue to be largely positive. Employment data is robust. Consumer confidence is near a 17 ½ year high. Corporate earnings are good with positive outlooks. Both the retail and technology sectors have been strong performers. At the time of this writing, the NASDAQ was to an all-time high. Only housing starts have appeared to slow. We believe this data continues to support our narrative of a US economy on very sound footing, which bodes well for equities.
On the bond front, the spike in interest rates, or yields, we saw earlier has reversed for now. At the time of this writing, the yield on the 10-year government bond is once again below 2.95%. More importantly, inflation continues to remain quiet. In recent Notes we have mentioned the return of newly inspired job seekers to the labor market as one possible reason for this absence of inflation, since they help keep wage growth down. Another possible reason could be something referred to as the “technology effect”. This is the idea that technology is improving efficiencies at such a pace that costs to the end user are not rising. Not only are companies doing more with less, but they are also delivering the goods to the end user with little to no change in cost. This gap between cost savings from technology and what the consumer pays provides an inflationary buffer.
Looking at the data, we continue to believe that the positives are outweighing the negatives. And as a result, we continue to maintain our globally diversified allocations keeping our clients invested. There is no denying that news, especially in the geopolitical realm, has an impact on markets. It does appear that patience has been rewarded recently over immediate reaction. Perhaps as summer gets into full swing, economic events may find themselves in a lull, allowing everyone to take a breather. As the Italians say, “Nulla Nuova, Buona Nuova.” Translated, “No news is good news.” But we are not counting on it.