With 2018 nearing the halfway point, now is a great time to sort through the headlines and get to the bottom of what’s been going on in the markets recently. US markets have been slightly up on the year thanks to the continued presence of healthy fundamentals and positive surprises on earnings. We’ve also seen unemployment nudge lower and inflation nudge higher. While we remain cautiously optimistic given the strong state of our economy, there are plenty of reasons to expect a bumpy ride. As trade talks continue between the US and a variety of its trading partners, we’ll likely see increased volatility as markets try to make sense to what the lasting impacts of various agreements will be.
Internationally, we also anticipate volatility as the Eurozone continues to face uncertainty. Most recently, the election of a new Italian President and the potential formation of a populist-leaning government led by an anti-Eurozone finance minister was cause for concern. Ultimately, the nomination was blocked by the president and the coalition collapsed. Since then, the situation there has been uneasy with some calling for the newly elected President to be impeached. Given that Italy has a troublesome amount of debt as one of the largest economies in the European Union, a decision to withdraw from the union could send major shockwaves across the continent, something the markets will be very mindful of in the days ahead as we watch the situation there pan out.
On the fixed income side of things, bonds have been down as yields continue to rise. You may have read that the Fed hiked rates earlier this month, in a move largely anticipated by markets. As the economy continues to do well, it seems likely that we will see a couple more rate hikes by the end of the year. Despite this performance, we continue to believe in the presence of bonds in our portfolio as a defensive guard against a future market pullback. While it's impossible to know when the next pullback will occur, it's helpful to remember that with each passing day that our economic expansion continues, we inevitably find ourselves that much closer to it's end.
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