For Q2, US stocks were up 3.9% (VTI) and international stocks were down 3.5% (VEU). US bonds were roughly flat as the Fed marched forward with its plan to slowly raise interest rates and normalize its balance sheet.

Small-cap stocks outperformed, perhaps because they are viewed as less vulnerable to tariffs. Energy was the best performing sector, up 13.4% (XLE). We view rotating size and style leadership as healthier for a sustained bull market.

Trade war talk rattled global markets and cast a shadow on exceptional earnings growth and a strong overall economy.

As expected, the Fed raised its short-term target rate by 0.25% to a 1.75%–2.00% range. It also suggested that two more hikes, instead of one, are likely in the cards this year. Ultimately, 0.25% one way or the other won’t make or break the economy or the stock market, but a new era in monetary policy puts more pressure on companies to impress.

In 2017, international stocks broke the trend and outperformed the US. As a result, many investors shifted allocations late last year or early this year to more heavily weight international.

The US housing market appears to be in a good place to continue to support the slow and steady economic growth fueling this bull market. In most of the country, owning a home still probably makes sense if you want to stay put for at least 6 years, but valuations are getting extreme in some pockets.

Looking Ahead

In recent weeks, markets have been yo-yoing on talk of a trade war and tariffs. On days when there is little or no trade news, the US market still seems to want to climb higher. We’ve been surprised that the exchange of tariffs has gone as far as it has. The situation has moved beyond threats and is now taxing the global economy.

Steel and aluminum tariffs went into effect in March, and as of July 6 the US has imposed tariffs of up to 25% on $34 billion of Chinese goods. China is implementing retaliatory tariffs expected to be of equal scale. For perspective, 25% of $34 billion is under $9 billion, which is about 1% of the value of Apple.

The Tax Foundation estimates that if all threatened tariffs announced so far are enacted, the impact to US GDP would be around 0.4%. That would be meaningful, but not enough to solely dictate the direction of stocks or bonds. The bigger threat is that as new tariffs are introduced, companies could freeze decision-making and investment until they understand the new rules.

Amid the focus on trade, decisions by the Fed and other major central banks may actually prove more important to the longevity of this bull market. Fed Chairman Powell is data-driven and balanced in considering tradeoffs in risks to inflation and growth. And, as expected, the federal funds target rate was raised a quarter of a point to a 1.75%–2.00% range in early June.

The surprise came from comments suggesting that two more hikes (instead of one) are likely in the cards for this year. Ultimately, 0.25% one way or the other doesn’t make or break the economy or the stock market. But a new, less accommodative era in monetary policy is here. Higher rates will put even more pressure on companies to hit earnings targets in the face of higher borrowing costs.

Don’t Give Up on International

This nine-year bull market has featured gains of over 300% for US stocks and “only” about 130% for international stocks. 2017 was an exception. International led, and emerging markets provided the strongest returns. As a result, many investors shifted allocations late last year or early this year more heavily toward international. This is classic “chasing heat,” and so far it has been a mistake. Predictably, many are now giving up on that bet and moving back toward the US.

The Current Housing Market

The housing market was a major driver of the expansion during the 2003–2007 bull market, and a major casualty when the music stopped in 2008. Once again, home prices are hitting all-time highs, but with very different dynamics from the last cycle. As an important contributor to GDP and a big part of net worth for the 65% of American households that own their home, it is worth keeping an eye on signals from the housing market.

Looking at the big picture, the US housing market overall appears to be well positioned to continue to support the slow and steady economic growth that has fueled this bull market. In most of the country, owning your primary residence still probably makes sense if financially possible, and if you want to stay put for at least 6 years.