2Q17 MARKET OVERVIEW
In the face of accelerating political roadblocks and a further delay of President Trump’s pro-growth agenda, the markets were relatively calm in the second quarter. Fortunately, the political tug-a-war was overshadowed by the improving global economic backdrop and steady corporate profits.
As we closed out the quarter, our diversified investors once again celebrated the general direction of the markets and their rising portfolio balances. Our global investment approach participated in the broad rally throughout the first half of 2017. Although just about every market index was positive with the exception of commodities, investors with international equity and fixed income exposure experienced optimal results with the help of a softening U.S. dollar.
As we progress further into the year in anticipation of additional Fed monetary policy tightening and volatility, we will continue to take advantage of diverging market trends by rebalancing to target allocations while maintaining your desired risk level and fulfilling your cash flow needs. This process typically involves harvesting gains or losses in the most tax-efficient manner possible and then re-allocating the proceeds to out of favor asset classes that offer more attractive long-term opportunities such as international equities and bonds. This process is likely to become more interesting and involved in the months ahead as our government tries to reach an agreement on any meaningful policy change.
U.S. Equity Markets
The U.S. equity markets advanced despite the mixed landscape; the Russell 3000 increased 3.0% for the quarter and healthy 8.9% for the first half of 2017. The post election boost to consumer and business confidence continues to be tested considering the on-going political gridlock in Washington. Fortunately, investors focused on healthy consumer spending, low inflation, a maturing economic recovery data and favorable earnings growth rather than the political difficulties to move the markets in an upward sloping direction. Continuing the trend in the first quarter, large cap and growth oriented stocks outperformed other U.S. equity categories and rewarded less economically sensitive sectors. Declining crude oil prices and telecom price competition led to underperformance compared to the overall market. On the job front, the U.S. Bureau of Labor Statistics reported that the unemployment rate ticked up slightly to 4.4% in June as the economy surprised on the upside by adding 222,000 jobs. As companies report their latest earnings, we will focus on guidance related to rising employment and interest rate costs to determine how this might impact future profits. These pressures could lead to increased volatility, especially if top line revenue growth doesn’t live up to expectations without a Trump pro-growth advance.
International Equity Markets
International developed equity markets continued their impressive run with a 6.1% quarter gain and 13.8% first half return for the MSCI EAFE. After experiencing two recessions in the past ten years and many earnings disappointments, reduced political risk and improving corporate earnings led to further eurozone market momentum. Markets celebrated Emmanuel Macron’s convincing French presidential victory as fears subsided about the eurozone breakup. European companies also benefited from an improving economic landscape as many reported a pick-up in sales and earnings growth. Compared to U.S. companies, international equities are coming off a much lower earnings base and investors are taking notice by moving capital back into the area. This capital should provide continued energy as the recovery matures. In Japan, a more favorable economic outlook coupled with a spike in consumer spending and improving industrial production boosted returns in the second quarter. Shinzo Abe’s guidance and vision are helping Japanese companies become much more profitable in a stable environment. With all of the world’s top 20 economies growing this year, emerging markets (MSCI EM) added 6.3% during the quarter as they increased production to keep up with export demand and further support the impressive 18.4% first half gain in 2017. Both developed and undeveloped international markets continue to look much more attractive from a valuation perspective compared to U.S. equities.
Fixed Income Markets
Safety-minded investors experienced a modest rebound to in the second quarter; the Barclays Aggregate rose 1.45%. After the Fed raised rates for the fourth time in ten years, the 10-year Treasury retracted from 2.40% on March 31 to 2.31% on June 30. Given the 9 basis point overall yield decrease, longer dated maturities posted more positive returns since their existing bonds became more attractive compared to newly issued securities. The Barclays US Government Long posted a 3.9% quarter gain, Intermediate 0.7% gain and Short 0.2% gain. In the international fixed-income arena, the JPM Non-US Unhedged advanced 3.5% in the quarter with the help of a weaker U.S. dollar. The Barclays Municipal staged a healthy recovery gaining 1.9%. Given the increased uncertainty of expected tax law changes, investors re-focused their bets on the likelihood that Municipal bonds will continue to provide a tax advantage in the foreseeable future.