Domestic equity markets led the way in the second quarter of 2018, with solid performance from both small and large companies. Strong corporate earnings, buoyant consumer sentiment, and excellent job markets all contributed to positive returns and lower volatility. Large-cap stocks in the S&P 500 gained +3.4% for the quarter, pushing year-to-date returns positive. Stocks of smaller companies, represented by the S&P SmallCap 600, surged +8.8% in the second quarter. Equity markets continued to climb despite further tightening by the Federal Reserve (Fed), which raised short-term interest rates.

On the international front, a strengthening dollar and ongoing tensions stemming from the possibility of a trade war took a toll on international equity returns. The MSCI Europe, Australasia, and Far East (EAFE) index lost another 1.2% for the quarter and was down 2.8% for the first half of the year.

Bonds were nearly flat for the quarter, despite the Fed’s continuing tightening. The Bloomberg Barclays U.S. Aggregate Bond index lost 0.2% over the last three months. For the year, bonds are down 1.6%. Muted inflation and rising short-term interest rates caused the yield curve to flatten in the last month.

The Financial Engines perspective.

While the second-quarter volatility of equity markets was significantly lower than in the first quarter, plenty of news kept investors on edge. The biggest concerns were around increased tariffs announced by the U.S. These triggered retaliatory moves from the European Union and China, raising the specter of a damaging trade war. So far, the negative effect of political events on the markets has been modest, but sentiment can change quickly. In these times of heightened political and economic tensions, it pays to be broadly diversified. Remember, Financial Engines continues to monitor markets and update your allocation to help keep you on track.

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