August 21, 2018

Emerging market (EM) equities have been under pressure recently thanks to the combination of a stronger U.S. dollar, the ongoing U.S. and China trade dispute, concerns in Argentina, and now worries over the financial stability of Turkey.

Is Turkey the first domino to fall, and will a global crisis follow? Fortunately, we don’t feel that is the case at this time, as many of the Turkey issues have been self-inflicted.

Emerging Markets (EM) have significantly underperformed the S&P 500 Index and MSCI EAFE Index this year, but since June, the underperformance has been even more pronounced.

The Turkey situation is something we are watching closely, but with EM overall still seeing solid economic growth, strong demographics, and attractive valuations, we continue to suggest modest EM exposure for suitable investors looking to maintain a well-diversified portfolio.

Close, but no cigar. Last week, the S&P 500 has closed within 2% of record highs for 11 consecutive trading days, the longest such streak since September 2017. We’re optimistic that the index will break out to new highs soon as reports show a solidifying macro backdrop and another strong earnings season wraps up. However, it is the historically troublesome month of August, and stocks may consolidate near record highs for longer amid low volume before we see new records.

Policy remains a key theme to watch. Tax cuts, a more business-friendly regulatory environment, and increased government spending should support consumer spending, business investment, and corporate profits. The biggest risk to investor confidence this year has been around trade, including new tariffs. When comparing the fiscal measures with the potential impact of increased tariffs, however, the benefits appear to outweigh the costs. With these factors in mind, policy changes should have a positive influence on the economy and markets.

Strong earnings are expected to remain the key driver of stock gains, thanks to the benefits of the new tax law. Given that we are in the later stages of this economic cycle, with factors such as increased trade tensions and geopolitical uncertainty at play, greater market volatility may be ahead. But it’s important to remember that experiencing these ups and downs is a normal aspect of our market environment.

As always if you have any questions, I encourage you to contact me.