June 2018 Market Summary by Jack Moller, CFP®

Cracks in Foundation?

Over the past few months, I’ve noted how many markets had been in tight trading ranges and how they have selectively broken out of these ranges.  Heading into June, only the U.S. dollar and U.S. small company stocks seemed to have broken out of their trading ranges, both to the upside.  In June, more markets broke out of their trading ranges, this time to the downside; specifically, many non-U.S. markets as casualties of the continued dollar strength.  International market weakness occurred pretty much across the board from Europe to Asia and both large and small companies.  Particularly hard hit were the emerging markets as they got walloped last month with the bellwether Vanguard FTSE Emerging Markets fund dropping nearly 5%. 

The deterioration in the emerging markets was not surprising considering the alignment of forces pressuring them:

1.  China, which despite its size is still considered an emerging market, has been under stress due to the trade “war” talk with the nascent imposition of tariffs.  China has also been impacted by the governmental efforts to rein in their debt situation.  These combined forces no doubt factored into Chinese stocks entering into a bear market in June, having fallen more than 20% from its peak.

2.  As a major consumer of commodities, China’s economic struggles put downward pressure on commodity prices.  On the other hand, many other emerging market countries actually are commodity producers, relying heavily on exporting raw goods.  In a sort of domino effect, the weakness in China reduced demand for these country exports hurting their economies.

3.  Financial stress due to the strong dollar has also hurt.  As in the late 1990s when the emerging markets were hit hard, many of these economies have borrowed huge sums of money denominated in U.S. dollars.  The strengthening dollar combined with rising interest rates is severely hampering the ability of emerging market companies and economies to service this debt.

Troops not following the generals?

Many bull markets start to lose steam when the leadership narrows.  That is, markets often begin to form a top when fewer and fewer stocks rally as indices are led to new highs on the backs of just the few highfliers.  On a global level, the bull market might be exhibiting this breakdown now as the aforementioned weakness in overseas markets left the rising U.S. markets more or less flying solo.  This behavior was in sharp contrast to the broad, synchronized advance in 2017.  Furthermore, leadership has narrowed internally in the U.S. as well.  Reminiscent of the 1990s, our indices have been pulled higher on the backs of a few mega-cap tech companies. 

With all the political talk by the Trump administration of “America First”, we may be seeing more of a phenomenon of “America Last”, as in the last strong market to rollover. We’d like to see participation in the bull market broaden both in the U.S. and worldwide to feel more comfortable about the continuation of this aging bull.

Regardless of how we feel about these short-term trends, we are confident that exhibiting diversification and discipline with the investment process is the best path to stay on track with our long-term plans.