Second Quarter 2018: Tit for Tat
Tit-for-tat trade retaliation took center stage during the second quarter. Canada levied retaliatory tariffs on wide variety of US agricultural products in response to steel and aluminum tariffs announced by the Trump administration in March. China likewise promised to retaliate along the same lines. As the quarter ended, President Trump raised the possibility of escalating the conflict with 20% tariffs on imported European automobiles, a move which EU Officials were quick to condemn.
Italian political turmoil roiled international markets as a new government raised the possibility of Italy exiting the European Union. Italian equity markets sold off sharply while bond yields rose, pushing Spanish and Portuguese yields higher, reminiscent of past European debt crises. The trade and politic turmoil pulled developed international equity prices downward in the quarter, with European financials heavily impacted. Emerging market stocks were also heavily hit. Causes ranged from NAFTA trade worries in Mexico, growth problems in Brazil, to continual political problems in Turkey.
Despite trade woes, US stocks were up across the board for the quarter, with REITs and small cap names leading the way. In a familiar refrain, growth stocks outperformed their value counterparts. Returns for growth names have been so strong that over the past ten years growth has outperformed value by over 3% annualized. However, over the past 15 years, value has provided almost 2% of outperformance above growth indices.
The US labor market continued to strengthen as employers voiced concerns about the lack of quality job applicants. However, wage growth remains elusive and consumer spending is beginning to slow. In good news for renters, there has been a large increase in multifamily inventory, slowing rent increases in major markets. The Federal Reserve raised rates in June as its primary inflation measure hit its target. In an interesting reversal, after years of hawkish positioning from Republican policy makers, Trump economic advisor Larry Kudlow warned the Federal Reserve about blunting current economic growth by raising interest rates too quickly.