Quarterly Insights – Q2, 2018


The first half of 2018 has seen the return of volatility with somewhat uneven end results. While domestic equities (S&P 500 Index) rebounded somewhat in the second quarter, both developed international (MSCI EAFE) and especially emerging markets (MSCI EM Index) suffered losses. “Conservative” core bonds were only down small for the quarter, but are still at a meaningful loss for the year. From a high level, it appears that U.S. stocks are the positive outlier amongst these traditional asset classes. However, when you dig a little deeper, U.S. stocks are also showing signs of strain. Though the S&P 500 Index is up 2.7% for the year, the strong results of only a handful of stocks are masking the mixed performance of the rest. Specifically, if you remove the top 10 performing stocks for the year (most of which are in the technology sector), the S&P 500 would have a negative return. 

There are undoubtedly short-term positives in the economy today: the tax cuts have provided a pickup in economic growth and the labor market continues to be strong. However, the longer-term concerns are still there, including record-high debt (at the government, corporate and consumer levels), as we go into a cycle of increasing interest rates and inflation. 

The table below summarizes the second quarter and year-to-date (YTD) performance for selected indices. 

Index Q218 YTD Large U.S. Companies (S&P 500 Index) 



Small U.S. Companies (Russell 2000 Index) 



Developed Foreign Markets (MSCI EAFE Index) 



Emerging Foreign Markets (MSCI EM Index) 



Core U.S. Bonds (Barclays U.S. Aggregate Bond Index) 



Catastrophe Bonds (Swiss Re Global Cat Bond Index) 



Commodities (BBRG Commodity Index) 



Gold Spot (USD/Ounce) 



Hedge Funds (HFRI Fund of Funds Composite Index) 



Source: Bloomberg. Please see important disclosures at the end of this commentary.

Tariffs – A Historic Perspective

With talks of trade wars and tariffs taking center stage in the past few months, we thought it would be beneficial to provide a brief historic overview of tariffs, the rationale behind them, and whether or not they are effective policy tools. A tariff is simply a tax imposed by a nation on an imported good. This tax, in effect, increases the price of the imported good, thus giving the competing domestic good a relative price advantage. The first tariff ever levied by the U.S. government was the not-so-disguised Tariff Act of 1789. The primary objectives of the Act were to lower the U.S. debt load and to protect manufacturers. These were clearly stated in the Act:

Whereas it is necessary for that support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufacturers, that duties be laid on goods, wares and merchandise . . .”

While on the surface it may seem like tariffs should be pro-growth for the domestic economy, history has shown that it is not that simple. For example, the Tariff Act of 1930—known as the Smoot-Hawley Tariff—increased tariffs at unprecedented rates. The bill, which was signed into law by President Herbert Hoover over many protests from the economists at the time, was designed to protect the U.S. economy and encourage domestic spending. In retaliation, European countries imposed their own tariffs on U.S. goods. This resulted in a trade war that many believe was a major contributing factor leading to the Great Depression.

Are All Trade Deficits Bad? – Goods vs. Services

The current U.S. administration has used our trade deficit as the rationale for why tariffs are necessary to equalize global trade. The argument is that our large trade deficit reflects an uneven playing field in global production where we cannot compete with the subsidized, low-cost producers in countries like China. While there is some logic to this argument, again, it is not that simple. Trade imbalances are not necessarily a reflection of countries’ trade policies, but rather are impacted by a number of macroeconomic factors, such as the relative growth rates of countries, the relative values of currencies, as well as those countries’ savings and investment rates.

It is also important to put the U.S. trade deficit in context, both in terms of its size and nature. According to the Bureau of Economic Analysis, and as illustrated in the below chart, the latest monthly trade deficit figure was $46.2 billion, which translates roughly to only 2.9% of U.S. GDP (gross domestic product) on an annualized basis.

U.S. Trade Balance of Goods and Services vs. GDP – Source: Bloomberg

While all the talk has been of our goods deficit, there has been little focus on the positive part of the picture: namely, our rapidly increasing trade surplus in services. While the U.S. has a trade deficit in goods with numerous countries, it actually enjoys a trade surplus in services with many of those same countries. The chart below shows that this service surplus has more than tripled in the last two decades.

Source: U.S. Bureau of Economic Analysis, fred.stloiusfed.org

In fact, service industries now account for over 70% of U.S. jobs. The trend toward service exports reflects our strength as a country in areas such as finance, insurance, sales from intellectual property, and travel and transportation. The current emphasis on bringing back manufacturing jobs seems to be focusing more on fixing our weaknesses rather than capitalizing on our continually growing strength in these service sectors.

MC Client Commentary – July 2018 | 3

We Do Not Predict – We Prepare

The U.S. financial markets’ reaction to the proposed tariffs has so far been somewhat muted. The economic data and company earnings have been relatively strong, so perhaps the markets do not believe the uncertainty associated with these actions will lead to disruptions in the economy. The truth is that no one knows yet what the impact of these policies will be. Our concern is that, ultimately, no one wins in a trade war: global growth is the loser across the board.

While we cannot predict where the financial markets will end up for the year, we do expect more episodic volatility in response to this type of political uncertainty. The reality is that we cannot structure our client portfolios to be immune from this volatility or any future dislocation that may result. What we can do, however, is evaluate risk and overweight those asset classes where we feel we are best being paid for the risk we are taking. Whenever possible, we look to incorporate investments with the ability to generate returns that are not solely reliant upon economic growth or low interest rates for their success. The more varied the drivers of returns in a portfolio, the better we sleep at night.

Please do not hesitate to contact your Morton wealth advisory team if you have any questions or would like to discuss your portfolio in more detail. As always, we appreciate your continued confidence and trust.

Morton Capital Investment Team


Disclosures: This commentary is mailed quarterly to our clients and friends and is for information purposes only. This document should not be taken as a recommendation, offer or solicitation to buy or sell any individual security or asset class, and should not be considered investment advice. This memorandum expresses the views of the author as of the date indicated and such views are subject to change without notice. All information contained herein is current only as of the earlier of the date hereof and the date on which it is delivered by Morton Capital Management (MCM) to the intended recipient, or such other date indicated with respect to specific information. Certain information contained herein is based on or derived from information provided by independent third-party sources. The author believes that the sources from which such information has been obtained are reliable; however, it cannot guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information. Predictions, projections and forecasts contained herein may not be indicative of actual future events and are subject to change without notice.

Certain private investment opportunities discussed herein may only be available to eligible clients and can only be made after careful review and completion of applicable offering documents. Private investments are speculative and involve a high degree of risk.

The indices referenced in this document are provided to allow for comparison to well-known and widely recognized asset classes and asset class categories. Q2 returns shown are from 03-29-2018 through 06-29-2018 and the 2018 year-to-date returns are from 12-29-2017 through 06-29-2018. Performance shown does not reflect the deduction of any fees. The volatility of the benchmarks may be materially different from the performance of MCM. In addition, MCM’s recommendations may differ significantly from the securities that comprise the benchmarks. Indices are unmanaged, and an investment cannot be made directly in an index.

Past performance is not indicative of future results. All investments involve risk including the loss of principal. Details on MCM’s advisory services, fees and investment strategies, including a summary of risks surrounding the strategies, can be found in our Form ADV Part 2A. A copy may be obtained at www.adviserinfo.sec.gov.

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