Mid-Quarter Commentary

Domestic equity markets have rebounded during the first half of the second quarter, with the S&P 500 and S&P 600 indices rising 2.9% and 4.81%, respectively. Much of this strong performance is been attributed to continued confidence in the underlying fundamentals of the U.S. economy and better than expected corporate earnings. The significant rise in the price of crude oil, up 9.8% through May 15th, has also been a wind at the back of the equity market since the beginning of the quarter. As we noted in our quarterly outlook, the market volatility experienced in early 2018 was the culmination of increasing pressure on asset prices caused by higher interest rates as the Federal Reserve gradually tightens monetary policy.

Corporate earnings this quarter have been remarkably strong; of the 457 S&P 500 companies that have reported, 76% have announced earnings that exceeded analyst expectations. Energy has led all sectors, posting a nearly 15% return for the second quarter to date. We expect energy stocks to continue to outperform given the recent strength of energy prices. Stronger demand/supply dynamics as of recently, coupled with the implications surrounding the United States’ withdrawal from the Iran Accord have been the driving forces of oil lately.

So far interest rates have risen across the yield curve this quarter, with the intermediate segment of the curve rising the most. As indicated by both CPI and PCE, inflation has been tracking at or above the Federal Reserve's target of 2%. If this continues, our analysis suggests that the Federal Reserve could raise rates up to three additional times this year. Currently the Fed Funds futures market is pricing in a 100% chance that the Federal Reserve will hike rates by an additional 25 basis points during the conclusion of their next two day meeting on June 13th. Mortgages have taken the lead from corporates as of lately, and we expect this trend to continue as the yield-curve flattens further due to tighter policy.

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