Our team at New England Investment and Retirement Group, Inc. closely monitors the markets and the global economy. We offer our Quarterly Considerations as summaries of market and economic performance so that we can educate our clients and help them make informed decisions about their financial futures.

Global financial markets posted mixed results during a volatile quarter amid escalating trade tensions, heightened political turmoil and concerns of higher U.S. interest rates. And the Trump Administration’s tariff announcements against China and other trading partners prompted retaliatory measures against the U.S.

Domestic equity markets were the performance standouts during the second quarter, as political turmoil in Europe and a resurgent U.S dollar weighed on international developed and emerging markets. And here in the U.S, small caps decisively outperformed large cap multinationals as investors preferred companies with a higher percentage of domestic revenue.

Second quarter events are driving performance across the globe.

Here in the U.S, GDP decelerated from the prior quarter to an annual quarter-over-quarter pace of 2%, reflecting the slowest pace of consumer spending in five years, according to the Bureau of Economic Analysis. Meanwhile, inflation expectations increased, with May core PCE hitting the Fed’s 2% target for the first time in six years amid rising energy prices and wages. The labor market remained resilient with unemployment falling to an 18-year low in May of 3.8% before closing out the quarter marginally higher at 4%. And corporate earnings continued to generally impress, aided by the tax reform package passed in December. While many of these metrics help lay the groundwork for continued growth, ongoing global trade rhetoric, additional Fed tightening and uncertainty coming out of Washington, are potential headwinds we’ll be watching closely in the weeks and months ahead.

Looking overseas, developed international equity markets produced mixed results as economic challenges, including trade and tariff concerns, as well as political uncertainty across Europe, weighed on investor sentiment. Amid trade war fears, Eurozone GDP slowed to 0.4% on an annual quarter-over-quarter basis, according to Eurostat, the weakest pace since mid-2016 on lower exports. Germany, the largest Eurozone economy and main exporter, saw its expansion cut in half from the prior quarter. Meanwhile, the European Central Bank outlined plans to end its massive bond buying program this year, but keep rates steady until next summer. In the Pacific region, Japan’s GDP fell 0.6% on an annual quarter-over-quarter basis after two years of steady growth, this, as private consumption slowed.

In the emerging markets, returns were negatively impacted by Brazil which plunged 26% ahead of October’s presidential election. Meanwhile, emerging markets such as Turkey, which also plummeted 26%, were further pressured by the strong U.S. dollar. After an exceptional showing in 2017, emerging markets are among the worst performing asset classes year-to date. And expect that volatility will likely persist, particularly over heightened trade war fears and escalating geopolitical events.

What did global market returns look like for the second quarter?

Starting with fixed income, as shown on the left of the chart (above), results were mixed as yields were volatile. The yield curve continued to flatten as shorter term yields rose more than longer term yields and the 10-year Treasury rose above the psychologically important 3% level before settling at 2.85%, 11 basis points higher than the first quarter. Core U.S. bonds, represented here by the Barclays Agg, declined by 0.2 percent, with mortgages providing the highest returns and corporates lagging the index. High Yield fared better, rising 1%, due to solid economic growth, higher energy prices and rising U.S. equities. Meanwhile, currency-hedged foreign bonds ended the quarter 0.5% higher. Unhedged foreign bonds suffered from strength in the U.S. dollar and fell 4.8%. Similarly, local currency EMD plunged 10.4%. Munis edged higher with lower quality issues outperforming higher quality issues.

Within global equities, results were mixed, with international developed and emerging markets stocks significantly lagging those here in the US. In the emerging markets, Latin America lagged, weighed down by Brazil. In emerging Asia, China posted results that outpaced the index despite escalating trade tensions. Among developed international stocks, those in the Pacific region lagged those in Europe. In the U.S., small caps significantly outperformed large caps, while growth remained in favor, clearly outperforming value.

In the Alternatives section of the chart (right), real estate, both in the U.S. and overseas, advanced during the quarter. Commodities ended mostly unchanged as strength in energy components was offset by weakness among several agriculture components, particularly grains. And MLPs rallied sharply during the quarter on strong oil prices, bringing year-to-date returns to near even.

Remain mindful of geopolitical risk and the associated volatility.

The quarter was marked by heightened global trade tensions, and in Europe politics was front and center, leading many to wonder if select policy decisions, legislation or elections were enough to derail financial markets. As we enter the second half of 2018, it is more important than ever to remain properly diversified. It is our continued belief that remaining patient and adhering to a well-constructed and diversified investment portfolio anchored to your time horizon and goals remains the prudent course of action.

Please contact your NEIRG team if you have any questions.

View our complete analysis of the second quarter of 2018 in our Quarterly Considerations presentation below.