What story line or events could shape what the markets do for the balance of the year?

• The Fed.  Since December 2015, the Fed has raised interest rates 8 times (each a quarter of a point) to 2%.   Speculation is that due to strength in the underlying economy, the Fed may raise rates two more times this year.   The Fed is reacting to “favorable” economic statistics.   Unemployment levels are at 3.9%, representing multi-year lows, and many forecasts are calling for Q2 GDP to come in around the three percent level (New York Staff Nowcast predicts 2.87% as of June 22^nd bringing the growth rate since the recovery to 2.26%). We believe the economy received a bit of a boost due to the tax reform package passed late last year and the corresponding one-time bonuses that some corporations paid to their employees are starting to flow through.   Unfortunately, we view this more of a one-time “pop” rather than the start of a meaningful trend.   We believe a significant portion of the benefits for Middle America derived from tax reform will be negated by higher energy prices and higher interest rates.   Accordingly, we believe long-term U.S. GDP growth will remain in the 2% – 2.5% range.

• Quarterly earnings in July will be interesting, especially for U.S. based companies.  It will be curious to see how companies view the political chatter about tariffs and trade wars and whether or not this has had any impact on business conditions.    Also, higher energy prices and a stronger dollar so far this year may have dampening effects on results and or guidance.

• November mid-term elections will certainly be noteworthy. To say that political emotions are running high would be an understatement. In some one off elections, democrats have fared better than republicans. Earlier this year, pollsters were forecasting that the Democratic Party stood a good chance of gaining Congressional control.   Recent polls, however, have showed that likelihood diminishing.   Keep in mind that the businesses and investors generally favor lower taxes and fewer regulations.  A shift in Congressional power would likely be viewed negatively by the markets.  Political forecasting is a difficult craft….just look at the Brexit vote and the U.S. elections in 2016!

Emerging markets (EM) have suffered of late.   Is this the start of a longer-term trend, or opportunistically? 

Rising interest rates in the U.S. have been a key driver behind the turmoil in the emerging markets.   While there will likely be additional upward bias for interest rates in the U.S., we believe rate hikes may not be as aggressive as feared by some on Wall Street.  Accordingly, it is our intention to gradually add to our exposure to these geographies, taking advantage of current weakness.    We find South Africa to be interesting, although we will proceed cautiously ahead of August elections.   We also plan on adding a name or two in the Asia/Pacific region over the ensuing months.   As in the past, we look to shun China as we find the nation’s lack of transparency troublesome.