Equities Achieve Positive Quarter Despite Volatility – Domestic Equity Markets Update

Energy and technology sector stocks led the markets in the second quarter. All three major indices ended the quarter positively, in light of volatility and trade policy tensions. The S&P 500 was up 2.9% and the Dow Jones was up 0.7%. The tech heavy Nasdaq advanced 6.3% for the quarter.

With oil prices climbing, the energy sector was the market’s top performer for the second quarter, marking its single largest quarterly gain since 2011. Technology sector stocks were also up for the quarter as the sector dodged the tariff turmoil during most of the second quarter, but may be adversely affected by a continuing strengthening dollar. US intellectual property and the growing prominence of technology in the global economy is becoming forefront for regulators, as the administration focuses on protecting U.S. intellectual assets.

Markets are attempting to decipher what industry and companies may be hindered by the newly imposed tariffs. Some companies plan to absorb a portion of the tariffs while others will pass along the costs in the form of higher prices to customers.

Liquidity among S&P 500 companies is distributed unevenly, with the top 25 companies in the index accounting for over 55% of the $1.9 trillion in corporate cash. The bottom 250 companies in the S&P 500 hold essentially no cash.

(Sources: S&P, Dow Jones, Nasdaq, Bloomberg)

Flattening Yield Curve Startles Markets – Domestic Fixed Income Update

The rapid rise of short-term rates along with lingering long-term rates created unease with markets. A lack of rising long-term rates is indicative of weak long-term economic growth, where inflationary pressures may not be present or expanding.

The continued increase in the 2-year Treasury yield is drawing interest from short-term investors as the 2.52 % yield at the end of June was greater than the 1.84% yield on the S&P 500.

The difference in yield between the 2-year Treasury note and the 10-year Treasury bond narrowed to levels not seen since 2007. Also known as the spread, the difference between the 2-year note and 10-year bond is a barometer of economic sentiment. Should shorter term rates, such as the 2-year note, yield more than longer term rates such as the 10-year bond, then economic growth is expected to be lackluster. Some analysts view this narrow spread as a temporary event until economic growth accelerates driving longer term rates higher.

(Sources: U.S. Treasury, S&P, Bloomberg)

What A Strong Dollar Means – Currency Overview

The U.S. dollar has risen over 4% since mid-April, driven by increasing interest rates and growing confidence in the U.S. economy. An expanding economy tends to generate inflationary pressures that lead to higher interest rates.

A stronger dollar can also be a hindrance for certain U.S. companies that have a large portion of their sales overseas. Should the dollar continue on its elevated trend, economists and analysts believe that the run up in the dollar will translate into lower earnings for a number of U.S. companies. Foreign investors tend to flock to the U.S. dollar as rates increase, seeking higher returns on idle cash from all over the world.

A challenge for U.S. multinationals when the dollar rises is the price of U.S. exports becoming more expensive worldwide. As the dollar increases in value versus other currencies, U.S. exported goods become less affordable in the international markets.

Conversely, the strengthening dollar has also made it more affordable for imported goods, which become less expensive as the dollar elevates. The single most significant benefit to Americans from a rising dollar has historically led to a drop in oil prices, which the U.S. still imports about a third of the oil consumed. But over the past few weeks, oil and gasoline prices have been rising, a diversion from previous dollar rallies.

Since nearly all commodities worldwide are traded in the U.S. dollar, a stronger dollar tends to lower the price of commodities internationally. Consequently, lower commodity prices tend to be negative for countries whose economies are dependent on commodity exports.

Sources: https://fred.stlouisfed.org/, Bloomberg, Commerce Department

Social Security Taps Trust Fund – Financial Planning

The Social Security program’s cost will exceed its income this year for the first time since 1982, forcing the program to access a $3 trillion trust fund to cover future benefits. Social Security is funded by two trust funds, one for retiree benefits and another for disability benefits.

The latest annual report issued by the trustees of Social Security and Medicare revealed that by 2034, the program’s trust fund will be depleted. Depletion means that Social Security recipients will no longer be receiving full scheduled benefits. Recipients would receive about three-quarters of their scheduled benefits after 2034. The report also mentioned that Medicare’s hospital insurance fund would be depleted in 2026, three years earlier than anticipated in last year’s report. The trustees noted that the aging population of the country has placed additional pressure on both the Social Security and Medicare programs. A decade ago, roughly 12% of Americans were age 65 or older, today 16% of Americans have already surpassed 65, the eligibility age for Medicare. The Social Security Administration considers various factors in projecting its estimates, including fertility, immigration, wages, health, and economic growth. A recent drop in U.S. birthrates along with stagnant wages has placed additional burden on the viability of future benefit payments. (Sources: https://www.ssa.gov/oact/TR/2018/index.html)