Summit Talks Dominate Headlines, Not Markets


  • Economic Growth Continues
  • Fighting the Fed. Old News?
  • Looking Ahead

Relative calm in the stock markets this week belied the whipsaws found in the headlines: A trade war with China was put on hold, until it wasn't. President Trump's undiplomatic cancellation of the June summit with North Korea was followed by an unexpectedly diplomatic response from leaders of that despotic regime. Iran barely earned a mention and yet it continues to smolder. 

Meantime, the announcement that Dodd-Frank banking regulations would be rolled back for small- and mid-sized banks found the usual allotment of proponents and opponents. Traders' approval was reflected in rising bank-stock prices.

Despite the ongoing headline hullabaloo, our investment view is unchanged: Markets will likely continue to benefit from days when fears take a back seat to fundamentals. Make no mistake; there are plenty of potholes on the road ahead. (There always are.) And, if you've found the Trump-related headlines unnerving this year, keep in mind that the closer we get to November's mid-term elections, the more likely headlines and markets are to become increasingly vitriolic and volatile.

Fear is a poor portfolio navigator. Moreover, we expect fear-driven selling will confound traders, but create opportunities for long-term investors like us and the strategies we invest in with you.

Economic Growth Continues

After Monday's tariff relief rally, the U.S. stock market has traded down slightly even as a number of economic reports suggested the slow-but-steady economic expansion remains firmly on track. For the year, the major U.S. stock market benchmarks are in moderately positive territory. 

Through Thursday, the Dow Jones Industrial Average has returned 1.3%, while the broader S&P 500 index has gained 2.8%. The MSCI EAFE index, a measure of developed foreign stock markets, is up 0.2%. The 3.32% yield on the Bloomberg Barclays U.S. Aggregate Bond index on Thursday is up from 2.71% at year-end. On a total return basis, the U.S. bond market clawed back a little ground this week, but is still down 2.2% for the year.

What Does Fighting the Fed Mean?

"Don't fight the Fed." It's been said that when Federal Reserve policymakers hike interest rates, the economy will eventually slow, so savvy investors should concede defeat and get out of the stock market. (And perhaps the bond market too, since rising interest rates mean falling bond prices.) 

Amazingly, when you do a quick Google search on the phrase "Don't fight the Fed," it has been contorted to support such a wide range of viewpoints as to have become essentially meaningless. We found: "Don't Fight The Fed, Just Ignore It," (TheStreet), "Don't Fight The Fed?" (Charles Schwab), "Don't Fight the Fed? Not For Bond Traders" (Bloomberg) and "Don't fight the Fed! 4 misconceptions about higher rates" (Jim Cramer/CNBC).

For all the talk about rising interest rates being the trigger for the end of the stock-market rally, it just hasn't played out that way. Short-term rates have jumped from almost zero to the current 2.54% yield on the 2-year Treasury. And the 10-year Treasury bond's yield has about doubled over the past two years. Over that two-year stretch, the S&P 500 index has gained 25.5% before reinvested dividends. The stock market has already weathered one round of rising interest rates. We don't think a few small additional interest-rate hikes will derail this economy or stock market, though investors who took the adage "it doesn't pay to fight the Fed" are probably wishing it would.

Sources: U.S. Department of the Treasury, Morningstar Direct.

Sources: U.S. Department of the Treasury, Morningstar Direct.

Looking Ahead

In the trade-shortened week to come, we will see a number of significant reports on the health of the overall economy, the consumer (confidence, as well as spending, savings and income), the job market, inflation, housing prices, inventories and the manufacturing sector, among others.

If you'd like to learn more about our tactical or fundamental strategies, please contact Steve Johnson at 844-587-7393 or We wish you an enjoyable and relaxing Memorial Day weekend.

Please note: This update was prepared on Friday, May 25, 2018, prior to the market's close.

This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations or personal investment advice, or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

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