In many ways, June was the tale of two months. Following through on solid gains in May, the major U.S. equity indices resumed their advance during the first half of June with the NASDAQ Composite, Russell 1000 Growth and the Russell 2000 Indices achieving new all-time highs. At the same time, the S&P 500 Index climbed to its best level since the late January/early February timeframe, when this widely followed index hit new all-time highs. However, a rapid deterioration in the trade situation, including tariff announcements and counter-announcements from the U.S. and various trading partners, spurred market weakness and higher volatility over the second half of June. News of potential restrictions on investment in technology companies from foreign players further exacerbated the equity sell-off and capital market volatility during the final week of the month. The volatility often seen historically in mid-term election years, due in part to uncertainty over policy issues, came to the forefront in June, epitomized by the immigration debate, which reached a boiling point. When all was said and done, most major U.S. equity indices were modestly higher in June. The S&P 500 Index edged slightly higher by 0.62%, while the Russell 1000 Index and Russell 3000 Index both gained 0.65%. Growth stocks (as measured by the Russell 1000 Growth Index) gained 0.96% outpacing the 0.25% achieved by value stocks (as measured by the Russell 1000 Value Index). The NASDAQ Composite and the Russell 2000 Index posted gains of 0.98% and 0.72%, respectively. The European Central Bank (ECB) met in June and announced a likely shift in course as it will taper its bond buying later in 2018 with bond purchases concluding by the end of the year assuming no major changes in the ECB’s outlook. International stocks struggled once again in June following declines in May. The MSCI ACWI ex USA Index, a measure of developed international equities, was off 1.88% and the MSCI Emerging Markets Index declined by 4.57% in June with both of these indices moving further into negative year-to-date territory.

Bonds experienced the same sort of dynamics that equities did in June. As equities rallied early in the month, the yield on the 10-year U.S. Treasury rose to just above 3% (intraday) in mid-June from around 2.75% in late May as Treasury prices declined. However, as volatility rose and trade issues intensified, a flight to quality ensued with Treasury prices rising and yields falling in the latter part of the month. Overall, rates rose modestly during the month, particularly for bonds maturing in 1 to 5 years with the yield on the 2-year Treasury increasing by 12 basis points to 2.52%. The 10-year U.S. Treasury rose 2 basis points during June to 2.85%. Returns were mixed for fixed income with the Bloomberg Barclays U.S. Aggregate Bond Index and Bloomberg Barclays U.S. Investment Grade Index declining in value, down 0.12% and 0.58% respectively. Treasuries gained 0.02% and municipals rose by 0.09% during the month. Despite elevated capital market volatility, high-yield bonds gained 0.40% in June, which in turn pushed year-to-date returns into positive territory. High-yield bonds have posted better relative results than most other pockets of fixed income through the first six months of 2018 as credit exposure has been rewarded. The Federal Open Market Committee (“FOMC”) met in June and, as expected, raised the fed funds target rate for the second time this year by 0.25% to a range of 1.75 to 2.00%. Market observers will continue to watch the actions of the Federal Reserve (“fed”) closely, especially as the fed continues on its current rate-hike cycle. Debate exists whether the fed will raise rates one or two more times in 2018, but with seven total rate hikes so far dating back to the first increase in December 2015, this would be characterized as a slow-paced and measured rate-hike cycle.

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EQUITY MARKETS
After solid gains in May, the S&P 500 Index and most major U.S. equity indices rose modestly in June. Despite some key U.S. equity indices hitting new all-time highs in the first part of the month, as trade tensions worsened in the second half of June, equity markets gave back some gains. Notwithstanding the volatility being seen in equities, the S&P 500 gained 3.43% for the second quarter and is now 2.65% on a year-to-date basis. The Russell 2000 Index, a measure of small capitalization stocks, hit a new all-time during the month, as did the NASDAQ Composite Index. International equities struggled in June, driven by strength in the U.S. dollar. While most major U.S. equity indices enjoyed gains overall for the second quarter of 2018, international equities declined. In addition to U.S. dollar strength, building trade tensions between the U.S. and much of the rest of the world has hampered international stock performance. Most major U.S. stock indices were positive in June with a slight performance edge of growth stocks over value stocks. International stocks struggled in June with both developed international and emerging market equities declining for the month.

FIXED INCOME MARKETS
10-year U.S. Treasury yields rose during the first half of the month only to decline in the second half. By the end of the month, the closing yield of 2.85% was up modestly from May’s close of 2.83%. Returns in fixed income were mixed for the month with the Bloomberg Barclays U.S. Aggregate Bond Index posting a decline for the month driven by the negative return of investment grade corporate bonds offsetting the slightly positive returns generated by U.S. Treasuries. High-yield bonds posted positive returns in June and are now in positive territory on a year-to-date basis. Municipals also recorded positive returns in June, but like the Bloomberg Barclays U.S. Aggregate Bond Index and U.S. Treasuries, remain in negative territory on a year-to-date basis.

ECONOMIC DATA
Economic data picked up in May and expectations built for a potentially strong second quarter of U.S. economic growth with the Atlanta Fed GDPNow forecast at 3.8%, while the New York Nowcast is showing a more modest expansion of 2.8%. The ISM Manufacturing Index and the ISM Non-Manufacturing Index were both above expectations and higher than April’s levels. Both readings remaining comfortably above the 50 mark, the dividing line between expansion and contraction for these indices. Also, May non-farm payroll additions were well above expectations and topped the 220,000 level, while the unemployment rate declined improving to 3.8%. Retail sales showed strong monthly growth in May as well. The final reading of first quarter 2018 GDP was revised modestly lower to 2.0%, which was below expectations and the prior mark of 2.2% growth, as consumer spending was lower than previously estimated. The Federal Open Market Committee met in June and, as expected, raised policy rates for the second time during 2018. The expectation is the Fed will raise rates again this year with some debate whether it will be one or two more times. Trade issues intensified during the month and whether this is part of ongoing negotiations or the beginning of an actual trade conflict could be pivotal to the ourlook for economic growth in the months ahead.

Event Period Estimate Actual Prior Revised
Nonfarm Payroll Apr 193,000 164,000 103,000 135,000
Nonfarm Payroll May 190,000 223,000 164,000 159,000
Unemployment May 3.90% 3.80% 3.90%
ISM Manufacturing May 58.2 58.7 57.3
ISM Non-Manufacturing May 57.7 58.6 56.8
Retail Sales ex Auto & Gas May 0.40% 0.80% 0.30%
Average Hourly Earnings YoY May 2.60% 2.70% 2.60%
JOLTS Job Openings Apr 6,350,000 6,698,000 6,550,000 6,633,000
PPI MOM May 0.30% 0.50% 0.10%
PPI MOM ex Food & Energy May 0.20% 0.30% 0.20%
PPI YOY May 2.80% 3.10% 2.60%
PPI YOY ex Food & Energy May 2.30% 2.40% 2.30%
CPI MOM May 0.20% 0.20% 0.20%
CPI MOM ex Food & Energy May 0.20% 0.20% 0.10%
CPI YOY May 2.80% 2.80% 2.50%
CPI YOY ex Food & Energy May 2.20% 2.20% 2.10%
Industrial Production May 0.20% -0.10% 0.70% 0.90%
Housing Starts May 1,311,000 1,350,000 1,287,000 1,286,000
Building Permits May 1,350,000 1,301,000 1,352,000 1,364,000
New Home Sales May 667,000 689,000 662,000 646,000
Existing Home Sales May 5,520,000 5,430,000 5,460,000 5,450,000
Leading Index May 0.40% 0.20% 0.40%
Durable Goods Orders May (P) -1.00% -0.60% -1.60% -1.00%
S&P CoreLogic CS 20-City YOY Apr 6.80% 6.56% 6.79% 6.73%
Personal Income May 0.40% 0.40% 0.30% 0.20%
Personal Spending May 0.40% 0.20% 0.60% 0.50%
GDP Annualized QOQ 1Q (T) 2.20% 2.00% 2.20%
Univ. of Mich. Sentiment Jun (F) 99 98.2 99.3
P = Preliminary, T = Third, F = Final
Source: Bloomberg

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