Summary of our thoughts at the end of the 2nd quarter of 2018

TO SUMMARIZE OUR THOUGHTS 6/30/2018

It’s getting later in the cycle, and while the current economic environment is supportive of continued earnings growth, the outlook for businesses has become somewhat clouded. The likelihood of rising inflation, tighter monetary policy, continued stock market volatility, and escalating trade
tensions are all significant factors.

For now, a healthy U.S. economy is an offset to growing trade concerns, and any positive resolution would be a significant tailwind for stocks. However, strong business and consumer confidence, which have propelled everything from capital spending, to hiring, to firming wages, could be deflated if there is not an easing in trade tensions.

Trade matters aside, as real GDP trends toward 3% and current real interest rates remain around 1%, the implication is for several more Fed hikes over the next couple of years. Fed hikes to this point have essentially kept pace with inflation, but the spread between short-term rates and long-term rates has compressed and the yield curve has flattened.

An inverted curve would suggest markets have lost confidence in the economic outlook while the Fed continues to apply the brakes. While flatter than it has been in the recent past, the current shape of the yield curve remains upward-sloping and not atypical for this stage of the economic expansion.

However, stock prices will continue to face headwinds as monetary policy tightens and uncertainties surrounding trade remain. As nobody can predict what the market is going to do in the short term, the turmoil observed during the first half of the year serves as a reminder that markets can and
will change.

Over the long-term, however, investors can smooth market volatility by focusing on companies that have relatively lower debt and predictable earnings streams in downturns.

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