After a volatile start to the year, U.S. stocks performed well in the second quarter, up 3.9%. Year to date returns for U.S. stocks are now positive, up 3.1%. Foreign developed and emerging market stocks declined in the quarter with emerging market stocks hit especially hard. Foreign developed and emerging market stocks are down 2.8% and 6.7% respectively for the year. U.S. and foreign bond returns are negative for the year. Foreign assets, stocks and bonds were negatively impacted by a strengthening U.S. dollar. Cash is the sole major fixed income asset class positive for the year. Interestingly, cash investments now yield more than U.S. stocks.

As we noted in our last newsletter, we are sharing updates on three issues:

1. Will the Fed raise rates too quickly? Inflation expectations for the U.S have increased since the start of the year which could force the Federal Reserve to raise rates faster than expected. However, growing trade concerns and tariff increases may limit future economic expansion. The Fed has signaled two more rate increases for 2018. With economic forecasts for the U.S. largely unchanged, we do not see the Fed raising rates more than two times this year.

2. How fast can company earnings grow after 2018? Amajor driver of U.S. stocks in 2018 and the second quarter were better-than-expected earnings, partly driven by lower U.S. tax rates. However, revenue growth has exceeded
expectations. Emerging markets earnings estimates have also increased this year. While earnings estimates for 2019 and 2020 have not changed materially, trends are positive.

3. Is the current global economic growth rate sustainable? Global GDP growth estimates are unchanged, with 3.8%the consensus estimate. Emerging markets represent nearly two thirds of the incremental growth. U.S. trade and tariff policy is a growing concern. While current tariff actions are not material to global growth yet, subsequent increases could jeopardize domestic and global economic growth.