The stock market is occasionally likened to a roller coaster, and that analogy was apt in the first half of 2018. After lots of ups and downs, worldwide stocks finished virtually where they began (see chart).

U.S. stocks fared slightly better, with the S&P 500 index gaining 2.6%. However, sector returns were bifurcated, with aggressive growth stocks outperforming more defensive areas. The NYSE FANGs+ index, which is made up of high-priced technology stocks and sports a Price/Earnings (P/E) ratio of 55, finished up nearly 30%. On the flipside, the defensive dividend-paying utilities and telecom sectors were down 8-9%.

Overseas stocks declined as a more aggressive Federal Reserve caused the dollar to rebound in the first half. Trade fears also weighed. Developed markets finished the first half down 2.4%, while emerging markets fell 6.6%. Overseas equity valuations remain attractive, in our view.

Bond markets also came under pressure as interest rates rose. The Barclays U.S. Aggregate Bond index lost 1.6% through June. Under-performance by bonds and dividend-paying stocks has made 2018 a challenging year for investors hoping to play it safe. Nevertheless, investors should maintain adequate amounts of defense in portfolios as the economic expansion enters into its 10th year.