July 2018 Market Update

Published on August 3, 2018 | Posted in Tips & Updates

Positive economic conditions as well as growth in corporate earnings pushed stocks forward in July. The Dow Jones Industrial Average led the way, advancing 4.71% (+2.82% YTD) while the S&P 500 added 3.60% for the month (+5.34% YTD). The growth came despite investor concerns over a trade war between the United States and its trade partners, including China and members of the European Union. The status of trade negotiations between the US and China has been most concerning due to the sheer size of the economic interdependence of the two nations. Despite this uncertainty and the importance of foreign investment, technology stocks continued their ascent, with the NASDAQ up 2.15% (+11.13% YTD). International stocks gained steam, up 3.76% in July and are now in positive territory for 2018, up 0.20% YTD.

The labor market showed mixed signs in July as job growth slowed, but the unemployment rate declined to 3.9%. Payroll additions for July were lower than the previous month, but still came in at 157,000. Analysts had optimistically projected that 193,000 jobs would be created due to a 50-year low in the number of people filing for unemployment benefits for the first time. Overall, signs of a tightening labor market suggest further reason for the Federal Reserve to continue to hike interest rates, which is positive news for fixed income investors. Opponents fear that a higher cost of borrowing could create headwinds and a resulting drag on economic growth which has fueled the recent bull market. Gross Domestic Product for the 2nd quarter came in at an annual growth rate of 4.1% as the economy expanded more than anticipated.

Interest rates rose modestly, with the 10-year US Treasury up 10 basis points to 2.96%. The Federal Reserve passed on any change in the federal funds rate at their meeting this past week, which took place on July 31st and August 1st. Fed watchers are now predicting the next hikes will occur in September and December, which keeps pace with a total of 4 rate hikes for 2018. Odds of a 0.25% rate hike in September are now over 90%, but signs of it being already priced in are readily apparent. The Fed Funds rate currently sits at a range of 1.75% to 2.00%. A flattening yield curve is giving investors reason to question their maturity laddering decisions with decreasing benefit for extending a bond’s maturity date. However, it remains important to preserve ones’ ladder to mitigate reinvestment risk in the off chance a market event pushes rates back to near-zero levels. Brokered Certificate of Deposit rates are leading the way in terms of offer rates for the short term investors and corporates and municipal bonds gain favor in the 5+ year timeframe.

Market conditions continue to present opportunities for the disciplined investor. Stock market gains year to date have shown that we are on pace for a more typical year than the tremendous growth seen in 2017. On the fixed income side, investors are starting to benefit from a rise in interest rates, but also can see the impact on current values which move inversely with interest rates. Investors who hold their bonds to term will not realize losses, giving additional importance to the maturity ladder decision criteria. Overall, rising current income is happening as dividends and interest rate hikes occur, while stable economic conditions are expected to protect valuations. As always, we appreciate having you as our client and look forward to serving the investment needs of our community in the future.

Eli Karttunen, Trust Investment Officer
Superior National Bank Trust and Financial Services