2nd Quarter Market Recap

2nd Quarter Market Recap

Despite fears of a potential trade war, equities reversed their first quarter slide and moved cautiously higher, with the S&P 500 closing the first half of the year up 3.22%. In a sign that investor sentiment has been affected by the looming tariffs, small cap stocks, which are less exposed to tariffs, rose even higher and ended the quarter up 7.66%.

The yield curve continued to flatten as yields on short-term bonds rose and yields on the long end remained fairly stable. The Fed raised the Fed Funds rate another 25 basis points in June which improved the yield on the 2 year T-Note 26 basis points. However, the yield on the 30 year T-Bond rose less than 2 basis points. Beyond the US border, yields around the globe remained at very low levels. While the ECB plans to eliminate its QE program by the end of this year, the gap in rates between the US and other countries widened further.

The rise in US interest rates, faster US growth, and a stronger dollar have negatively impacted emerging market bonds. The turmoil in Turkey did not help, either. The result has been a decline for investors of approximately 7%.

Through the quarter, oil prices rose due to reduced supplies from Venezuela, sanctions on Iran’s oil exports, and production disruptions in Canada. As a result, oil rose almost $10 and ended the quarter around $74/barrel. While the increase in energy prices was a positive for commodities, metals declined and left commodities flat year-to-date.

US REITs, which had declined due to rising rates, came back strong, rising 7.3% in the quarter, despite the persistent rate increases. As we have seen in research, REITs do not always move in the opposite direction of rates.

The spectacular rise in Bitcoin has seen an abrupt reversal so far in 2018. At the close of 2017, Bitcoin was trading above $19,000. By the end of June, the price had fallen below $6,000. Reasons behind the decline include: trading bans in certain countries, profit taking, and the hack of a cryptocurrency exchange.

Through the quarter, pro-business policies that have boosted earnings have acted to counter the potential negatives of trade policy. US economic activity accelerated in the 2nd quarter, and GDP growth could exceed 4%. Consumers continue to be the key drivers and confidence remains highs.

Around the globe, the US trade dispute was not solely directed at China. Renegotiations with Canada and Mexico over NAFTA persisted, and the European Union imposed retaliatory tariffs on some US imports.

In politics, Recep Erdogan called for a special election and boosted his consolidation of power, moving Turkey further away from a liberal democracy. In Italy, a coalition government led by the Eurosceptic Five Star Movement formed stoking fear of Italy’s withdrawal from the EU. While hostility between the US and North Korea moderated, tension between Iran and Saudi Arabia persisted as both countries vie for dominance in the Middle East.

Although Japan’s economy contracted, overall, growth around the globe prevailed. Moving into the second half of the year, we are concerned that prolonged discord over trade will undermine growth and fuel volatility.


Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

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