Highlights
• Investors mostly ignored the U.S./North Korea summit and last week’s Fed meeting. But rising trade risks are weighing on sentiment.
• U.S. growth is accelerating, as is inflation. This should prompt the Fed to continue increasing rates.
• We see several possible risks to stocks, but believe equities should continue to outperform bonds over the next year.
Last week was highly eventful, yet investors shrugged off most of the developments that drove the headlines. President Trump’s comments at the G7 meeting the previous weekend generated a lot of criticism, but investors mostly ignored any possible implications. Similarly, the U.S./North Korea summit appeared to open the way for further dialogue, but did not move the markets. Likewise, the Federal Reserve’s interest rate increase last week had already been baked into market expectations. Stock prices did decline on Friday in reaction to the U.S. announcing it would impose tariffs on Chinese goods, but equity markets were mostly flat to mixed for the week as a whole.1
Weekly Top Themes
1. We believe second quarter gross domestic product growth should be 3 percent or higher. The latest data to support this view came from stronger-than-expected retail sales in May, which rose 0.8 percent, the fastest pace in six months.2
2. There are risks that U.S. growth may be overheating. Wage growth is poised to accelerate further. And the housing market continues to gain strength, with prices climbing quickly in many markets.
3. Inflation continues to slowly increase. The May Consumer Price Index increased 2.8 percent year-over-year while core CPI rose 2.2 percent.3 We believe those levels will be around 3 percent and 2.5 percent, respectively, by the end of the year.
4. Fed rate hikes should continue through 2019. As was widely anticipated, the Fed increased the target fed funds rate to 1.75 percent last week. At this point, markets are expecting two more increases this year and three next year, especially since the Fed acknowledged that inflation should achieve its 2 percent target in 2018.1