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2nd Quarter 2018 Market Commentary from Cornerstone

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Volatility continued to be a significant factor in Q2 2018. REITs and small cap domestic stocks rallied strongly. Large cap stocks also staged a comeback. A rally in the dollar led to disappointing international equity returns, with emerging markets registering as a significant negative surprise.

The Fed raised interest rates another quarter point and signaled that it expects two more hikes in 2018. Interest rate moves pressured bonds. The yield curve flattened further, but despite concerns of a coming inversion, markets remained relatively sanguine.

While it has been our contention that the dollar trend changed in early 2017 and that currency trends generally persist for a period of five to seven years, the continued easy money policies being pursued by the ECB and the Japanese Central Bank have clearly temporarily halted the dollar’s decline.

U.S. unemployment hit a low for this cycle, and other economic variables continued to improve. GDP math points to a very high “print” (approaching 4%) in the second quarter. The U.S. economy continues to fire on all cylinders, and the likelihood of a recession occurring in the second half of the year remains remote.

Corporate profit margins have improved, and corporate earnings for the second quarter are expected to be quite strong. Consequently, the valuation of the U.S. equity market improved slightly during the quarter. However, we remain somewhat wary. Markets have narrowed. Further, growing rhetoric surrounding the “Trade War” and growing inflationary pressure suggest that caution is warranted.

 

About the Author

Bryan C. Taylor has over 20 years of experience in portfolio management and design. He is a Cornerstone Principal and currently serves as Chief Investment Officer and Chief Executive Officer at Cornerstone Management, where he oversees all operations and is Chairman of the Cornerstone Investment Committee.

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