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Technology and Small Caps Score Best Sectors for Q2 and 2018 - 7/5/2018

The Dow Jones Industrial Average and the S&P 500 reached the end of the second quarter well below their all-time highs from January 2018. The Trump tariff activity did not start until after January, and it remains the dominant impediment to U.S. stock market growth. The tech heavy NASDAQ Index and the small cap Russell 2000, however, made all-time new highs in June.

In general, while tariff worries dampen investor enthusiasm, technology and small U.S.-focused companies have been good defensive allocations this year in case trade tensions continue to escalate. Unfortunately, Commerce Secretary Wilbur Ross and economic advisor Peter Navarro authored a paper on economic policy arguing that trade deficits subtract from a nation’s economic growth. The vast majority of economists agree that trade deficits are meaningless and irrelevant to economic growth. Manulife Asset Management chief economist Megan Greene writes: Rich economies with deficits have grown faster than surplus economies over the past decade.

I believe the U.S. has a trade deficit in goods because American businesses and consumers have sought the best deals. The immense benefit of globalized free trade is that each nation does what it produces best at the lowest cost. The steel and aluminum tariffs have raised the cost of production for U.S. manufacturers that use metals, and several of them have already laid off workers. The White House business strategy seems to be something like this: Buy It HereIt’s More Expensive! The U.S. stock market will fare better if the moderate Treasury Secretary Steve Mnuchin gains more influence.

International Markets Fade
Due to weakening relative strength in international markets, we have reduced our international exposure in our active accounts. We are still holding on to some international positions which show the best resilience and offer the best opportunities for global diversification.

Bond Yields Increase
With the Federal Reserve continuing to raise interest rates, bond investors can earn higher yields than in the past with relatively low interest rate and credit risk. When it is appropriate to your long-term investment strategy, we recommend a bond allocation tailored to your financial plan.

I hope you enjoyed your July 4th holiday, and I always welcome your calls.

Best regards,
Jim Bell, CFP®
Founder, Chief Investment Officer

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