Key Points

  • Markets seem to have found a good balance between economic/earnings growth and trade concerns, allowing stocks to move back toward the top end of their 2018 range. But that balance can end quickly and investors should remain diversified and disciplined.

  • Earnings season has largely bested elevated expectations but we’ve seen disappointments punished severely. Trade concerns remain top of mind but a few glimmers of hope dot the headlines as well. Meanwhile, the Fed held rates steady and is searching for balance between growth and inflation.

  • Central banks remain in focus globally, with yield curves being closely watched. The Fed has expressed little concern but financial conditions have gotten tighter this year, which has implications for markets.

“Happiness is not a matter of intensity but of balance, order, rhythm and harmony.”
- Thomas Merton

Goldilocks peaks her head out

After searching for direction, it appears stocks have found some balance, at least for now. Major U.S. indexes have moved out toward the high end their recent ranges; with the NASDAQ recently hitting a new high and the S&P 500 threatening to do so, before again pulling back on continued trade tensions.

Stocks have moved toward top of recent range—but still vulnerable to pullbacks

Gains appear to have been fueled by a mix of continuing good economic news, with second quarter real gross domestic product (GDP) growth coming in at an annualized rate of 4.1% according to the Bureau of Economic Analysis. More than $20 billion was pulled from stock-focused mutual funds and exchange-traded funds (ETFs) in June, according to Morningstar—capping the third worst first half for equity flows in the past decade. The trend doesn’t appear to be changing as investors redeemed another $11.6 billion from domestic stock funds in the three weeks ended July 18. That healthy conflict between optimism and skepticism can be a good mix for stocks, as we’ve seen recently; but can also change relatively quickly so staying disciplined and not chasing returns remains important.

One reason for caution is that we’re entering what has traditionally been a tough time for equities. As we’ve noted before, midterm election years have been rough for stocks, with the average decline or “drawdown” being 17% in the S&P 500 since 1950, with much of the weakness clustered in the summer months. However, going from each of those midterm drawdowns’ troughs, the subsequent one-year performance was a strong 32%. History certainly doesn’t guarantee the future, but it does give us some reason for a bit of caution over the next couple of months.

Midterm years have had historical problems

Source: Charles Schwab, Macrobond, Standard and Poor’s. Past performance is no guarantee of future results.