Like May, June was full of headline stories. President Trump continued his trade war banter with our neighbors, Canada and Mexico, our allies in the European Union, as well as China. The President attended a historic summit with North Korea’s dictator Kim Jung Un in Singapore. There was a G-7 meeting in which the President showed up late and left early. OPEC met and announced an increase in oil production. Justice Anthony Kennedy of the Supreme Court announced he will retire this year.

Of all of these headline stories, the one with the least substance but the most potential impact to the markets is the brewing trade wars. Should all of the threats become reality, we could see a significant negative impact on the economy and the market. However, our view is that most of the threats are negotiating tactics that probably won’t become long-term policy. The President likes to congratulate himself on the economy and the markets, and he knows a full-fledged trade war would be damaging to both. No foreign leader wants to back down to Trump, but with a little conversation, there might be a way for everybody to make a deal in which they all save face without upsetting global growth. With last weekend’s election of a Trump-style Nationalist to Mexico’s presidency, the odds of a new NAFTA deal are unlikely in the short-term. More tariffs on Chinese goods could potentially go in effect in July but the Trump administration did back down from previous threats of imposing direct investment restrictions with China. In a related topic, Congress is working on legislation that would strengthen the Committee on Foreign Investment in the United States (CFIUS), an inter-agency panel chaired by the Treasury Department. The panel looks at the national security implications of certain deals that could give foreign investors control of a U.S. business.   

The historic summit between the United States and North Korea was newsworthy and historic but not impressive in terms of substance. They spoke denuclearization, but no timelines or specifics were provided and the U.S. agreed to stop war games with South Korea without even talking to South Korean leaders. It might be a good first step but if you had to anoint a beneficiary of the meeting you would probably give a slight edge to North Korea.

The President continued to ruffle feathers at the G-7 meeting. He provoked the other leaders by stating that he thought Russia should be invited back into the group, even though there is probably no chance of this happening anytime soon. He also decided, at the last minute, while en route to Singapore from the G-7 summit in Canada, to not endorse the G-7 joint statement which was released at the meetings conclusion. 

OPEC announced that they would increase oil production after 18 months of capping supplies in an effort to stabilize inventories and increase prices. President Trump chimed into the conversation, asking OPEC to increase oil production as oil supplies from Venezuela have dwindled and renewed U.S. sanctions on Iran are expected to bring some Iranian oil offline. Oil prices have seen a dramatic increase in prices mostly during the last 10 days of the month. Prices increased 10.61 percent. The energy sector finished the month positive by only 0.71 percent but a stellar quarter, finishing positive by over 13 percent.

The announcement of Justice Anthony Kennedy’s resignation will have little short-term impact on the markets but could have long lasting impact on the judicial system. The President’s second appointment of a justice to the high court will mostly likely impact the composition of the court for decades to come. The most expected impact under the Trump presidency is a rollback of environmental protections.

The markets got some relief from the Italian drama during June but it is presumed that the long-term pressures on struggling European countries to leave the Euro will continue for years to come. It appears the risks of a devastating outcome of a country using the Euro currency leaving is delayed yet again. This is a positive for global markets.

The U.S. economy continues to show signs of strength. The unemployment rate continues to tick lower and wages are increasing. For the first time in decades there are now more job openings than people looking for jobs. This begs the question, if the job market is so tight and the purpose of the trade war is to bring jobs back to the U.S., who is going to fill these jobs?

Earnings season will kick off in a few weeks and is expected to be strong, following a very strong first quarter. According to FacSet, the estimated earnings growth rate for the second quarter is 20 percent and analysts continue to estimate full year earnings growth to be over 20 percent. We continue to believe both economic and corporate fundamentals are strong.

Investors with diversified portfolios continued to benefit from this composition in June. Small cap stocks outperformed large cap stocks and are now outperforming them by just under 700 basis points year-to-date. Developed international equities were negative by 1.22 percent in June while Emerging Market equities lost over four percent. With a modest increase in rates, longer dated bonds had a negative month and remain negative year-to-date.

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