With a fully valued market, monetary policy headwinds and trade tensions, we are expecting to see a very similar second half of 2018 to what we witnessed in the first six months. We are expecting increased volatility with the major averages not straying too far from their current price levels. Within the markets though we expect to see certain companies and sectors outperform. This reiterates our view that the time for indexing in the US markets is behind us and the time for active asset management is just beginning.
Over the last five business days, the S&P 500 has had a price returned of 1.37%, while the Dow Jones Industrial Average has returned .99% and the tech heavy NASDAQ gained 1.9%.
The 3rd quarter began with good economic news; the ISM Manufacturing PMI came in at 60.2 vs the estimated value of 58.3 for the month of June. A figure greater than 50 signifies the economy is expanding as businesses continue to invest.
The case for over-weighting specific sectors and under-weighting other areas continues to become more apparent. Year-to-date, the Consumer Staples sector is down 8.92%, but recently these companies have been showing up attractively in our screens. We believe this sector will become even more striking as investors begin to make the relative comparison to the 10 Year U.S. Treasury Note. We don’t see the 10-year bond going beyond 3.25% to 3.5% in this cycle. If we are correct in that assumption, the case for these high dividend achievers stocks in the Consumer Staples sector looks interesting, especially considering their current valuations after this pullback.
This week, Mexico held their presidential election in which Andres Manuel Lopez Obrador was elected as the new leader of the country. He will officially take office in five months because Mexico has an unusually long presidential transition period. This is the first time in decades that the Mexican people elected a leftist leader. Mexico is the third largest trade partner of the US and therefore, it is important to keep an eye out as things materialize with their new trading policies.
The long anticipated monthly job numbers were released this morning. For the month of June, 213,000 new workers were hired and the unemployment rate ticked up slightly to 4.0% from 3.8% last month. The average hourly earnings came in at 2.7% year-over-year. This is a number that should be watched; as we get closer to full employment, businesses will have to increase pay to attract workers. This process could lead to higher unexpected inflation in the near future.
Our upcoming quarterly newsletter will expand on some of these topics and provide some guidance on what to expect for the second half of the year.