Introduction

We have previously highlighted that the tightening of monetary policies by the major central banks poses one of the greatest risks to global markets as it pressures valuations for financial assets. We think this remains true in the long-term, but in the short-term it appears that monetary policies are very likely to diverge as Europe and Japan stay on a course of easy money. This spring will stay coiled for a little longer.

However, this did not provide much relief. The continually escalating nature of President Trump’s trade war seems to have the most potential to derail the global economy. On a percentage basis of inter-regional trade, stakes are still small, but entire industries are being played as chess pieces. And in Europe, a Euroskeptic government in Italy means the political situation in the European Union (E.U.) is poised to become thornier.

Markets became increasingly volatile in the second quarter, and each month was successively worse with respect to stock returns, as these risks congealed. Over recent quarters, we have prepared for turbulent markets such as this by selectively emphasizing businesses with more defensive characteristics. These changes have served us well, and our portfolios have held up relative to the broad market.

Market Update

For the MSCI ACWI ex-U.S. Index®, growth style outperformed value style. Within emerging markets, growth style also outperformed value style. Large capitalization stocks outperformed small capitalization stocks in both the developed and emerging markets sub-indexes.

For the MSCI ACWI Index®, growth style outperformed value style, but large capitalization stocks underperformed small capitalization stocks. Within emerging markets, growth style also outperformed value style.

In the U.S., things are humming along, and reverberations have yet to surface from President Trump’s disruption of global trade. Unemployment reached 3.8% in May – the lowest rate in 18 years, and inflation reached the Federal Reserve’s target of 2% after undershooting it for much of the past 6 years. The Federal Reserve raised interest rates for the second time this year and suggested the pace of rate hikes is on track to keep inflation in check.

The E.U. economy entered 2018 on a high note, having recorded its strongest economic growth in a decade back in 2017. But now growth in the E.U. is slowing, hurt by a combination of mostly transient factors such as unusually cold weather, largescale strikes in Germany and France, and a severe flu season. But, so far, signals of a rebound back to recent growth levels have been muted. Consumer spending seems to have picked up, but exports have fallen and the Germany Manufacturing Purchasing Managers’ Index, though still positive, has stayed on a downward trend since the beginning of the year.