Quarter 2- Glacial Speed
Recently I had the opportunity to visit Alaska – a first for me. During our visit, we were able to get very close to a few glaciers. Several impressive things jumped out about these glaciers; their beauty, their awesome size and presence in the landscape and the incredible bright sky- blue colors of the surrounding icebergs were among the views that defy my ability to paint in words. As I looked at the path these glaciers and some of their predecessors had taken down the mountains I gained a new appreciation for their immense and unrelenting power. Huge valleys and chasms carved out of the mountain faces, leaving the certain path of the glaciers forever imprinted on the mountains.
It has taken a long time, often measured in centuries for the glaciers to make their way to the ocean and shape the mountains of their birth. But glaciers don’t just shrink; in fact, they go through periods in which they grow and expand their presence based on the weather shifts from cold to hot. Indeed, this pattern of growing and shrinking is an annual experience. I gained a new appreciation for a term I have used to express slow, but unstoppable movement – “moving at glacial speed”.
The financial markets have been doing a bit of a glacial dance this year. There is movement; but, it seems to be a lot of back and forth without real progress. Moving at glacial speed can be a bit frustrating. However, this back and forth movement by the markets is a good thing and is often a necessary part of building a base for more progress to come.
Through the end of the second quarter, stocks as measured by the S&P 500 stock index were up 2.65% on a total return basis. We made progress; but, there has been a whole lot of shaking and baking to get that step forward. Still, we continue to believe that we will see an 8 – 10% increase in stocks this year. Economic activity seems solid and feels like it can grow. The clouds on the horizon appear primarily to be of political composition. Trade wars feel more real than a few months ago and the imposition of tariffs on various products and markets casts some measure of concern on our forecast. We are hopeful that countries will try to use jaw bone tactics rather than more draconian escalations of tit for tat measures to work out differences. For now, we will move forward with our outlook for higher prices for stocks while keeping a wary eye for escalation of trade wars and tariffs.
Our forecast for interest rates is that the 10-year U.S. Treasury Note will see its yield rise to the 3 – 3.25% range by year end. Currently we sit with a 2.86% yield, up from 2.75% at the end of the first quarter. Like stocks, the yield for the 10-year U.S. Treasury Note has been very fluid. We believe the conditions for a continued, gradual increase in interest rates is in the cards and we are very comfortable with our forecast for interest rates to continue to gain altitude.
Our overall measure for economic activity is Gross Domestic Product in the United States – a measure that captures the heartbeat of economic activity. The first quarter final GDP number has been established as a 2.0% growth rate over last year. Second quarter estimates are hovering around 3.5%. The unemployment rate is at 4.0% down from 4.3% a year ago. There is an increasing sense of confidence about economic growth and its sustainability. Hence, we are making no changes to our projection of GDP growth in the United States to come in at a 3.0% growth rate or higher for the 2018 year.
We will maintain our underweighted exposure to the fixed income market while keeping our fully invested position in our equity positions.
May your summer vacation days move at a glacial speed and your travels be safe and adventurous.