Markets remained volatile in the second quarter as news headlines were dominated by geopolitics. A strong U.S. economy and increased trade tensions helped lead U.S. small caps upward, outperforming their large cap peers. Non-U.S. equities were negatively impacted from trade rhetoric and political tensions. Additionally a stronger U.S. dollar worried investors in EM assets, which were some of the worst performing assets over the quarter.
The Fed hiked rates for the second time this year by 0.25% in June. Continued strength of the U.S. economy and firmer inflation supported the rate increase. The median estimate by the Federal Reserve is for two additional hikes this year followed by three next year. The Fed remains committed to steady policy normalization.
Overseas, monetary policy from the ECB and BOJ remains stimulative. The ECB signaled their intent to wind down their Asset Purchase Program by the end of the year. However interest rates will be held at zero through at least the end of next summer.
The 10-year Treasury yield curve continues to flatten. Many investors are keeping close watch for the slope to turn negative, which historically has been a strong indicator of forthcoming recession. For now the U.S. economy remains on solid ground and a recession doesn’t appear on the near-term horizon.
