• The Federal Reserve’s rate hike was expected, but changes to its accommodative language caught investors’ attention.

• Overall, equities do not face enormous downside potential, and we think a focus on cyclicals and emerging markets may offer better risk-return potential.

• Discounting China, trade issues between the U.S. and most of the world appear generally positive.

U.S. stocks ended the week slightly lower after reaching new all-time highs last week, with the S&P 500 Index dropping 0.5 percent.1 Materials, financials and consumer staples were among the biggest detractors, while telecom, health care and technology moved higher.1 U.S. Treasury prices and the dollar also advanced.1 Oil prices ended the week up 3 percent amid growing concerns over tightening supply as a result of U.S. sanctions on exports from Iran.1

Weekly Top Themes

1. The Federal Reserve delivered a mixed bag. As expected, the Federal Reserve raised rates 0.25 percent to a target range of 2.00 percent to 2.25 percent. However, the Fed’s removal of the word “accommodative” from its statement drew greater attention from investors, causing some to speculate that the Fed is nearing its neutral rate. However, Chairman Powell noted the change in language doesn’t impact the likely path of policy.

2. Stock markets fell in the U.S. and Europe, but Asia was a bright spot. The Italian government’s 2.4 percent deficit projection for fiscal 2019 was higher than expected, causing some price weakness in European markets. Asian shares fared better than the U.S. and Europe, with Japan out in front.

3. U.S. trade negotiations continue to be in the spotlight. Following a prospective deal with Canada, trade issues between the U.S. and most of the world appear generally positive. But the U.S./China relationship is certainly deteriorating.

4. Inflation appears well contained, but that won’t last forever. Business owners are likely to raise prices to compensate for wage hikes and higher prices as a result of the developing tariff war. Inflation is well contained, but creeping higher. If inflation continues to rise in 2019, the Fed may be forced to take action. Relatedly, the Fed recently raised its GDP growth prospects for 2018 to 3.1 percent.2

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