After celebrating the major effects of the recent tax cut for most of the quarter, the U.S. stock market reacted to recent winds of tariffs and trade wars by shedding 40% of their quarter’s gains during the last half of June.  Overseas stocks lost ground as foreign economic growth slowed, real estate and commodities got back to even for the year, and bonds stabilized after the first quarter’s rout.

In 2018, the U.S. economy is growing more slowly than expected, even as the Federal Reserve has continued raising interest rates.  This led to a rise in the U.S. dollar, which makes tougher going for both emerging market stocks and higher dividend-paying equities.  With this backdrop, your portfolio’s growing stake in growth stocks, holding only short-term bonds and the changes we’ve made in the past nine months have all worked well.  As a result, your performance in these six months, where global stocks are up less than 1% and the bond market is down over 2%, has been positive.

The way tariff impositions and threats unfold in this still-healthy global economy is now a real wild card.  All nations lose when the uncertainty created causes businesses to hesitate when deciding on their commitments to new products, new markets, new suppliers and new employees.  It can slow economic growth everywhere when the rules-of-the-game that affect who wins and who loses keep changing.

The coming effects of further interest rate hikes are clearer.  If the Fed plans stay on course, rate-sensitive areas like real estate, emerging market and dividend-paying stocks, and intermediate-to-longer-term bonds will suffer.  You own no bonds of this type, and we will continue to further reduce your allocation to such types of equities over the summer in favor of both U.S. and foreign growth stocks.  This means a reduction in your holdings of Thornburg Investment Income Builder (TIBIX) relative to a year ago due to its emphasis on higher-dividend stocks in Europe, the U.S. and the Far East … at least until this period of rate increases comes to a close.

Of course, should events cause us to believe further steps are warranted, we will be in touch to share our thinking.  In the meantime, we hope you and your family enjoy a pleasant summer and thank you for the continuing opportunity to work with you.