Second quarter U.S. GDP got a nice revision, coming in at a 3 percent annual rate versus the previous estimate of 2.6 percent. On the other hand, geopolitical events, especially a number of missile tests by North Korea, led to increasingly volatile financial markets. The S&P 500, however, still managed to eke out a 0.31 percent gain in August. Emerging markets continued their hot streak, gaining 2.23 percent for the month, bringing year-to-date returns up to nearly 30 percent! Gold moved higher and treasury yields turned lower amidst the hectic stock market. The 10-Year U.S. Treasury yield ended August at 2.12 percent.
After an impressive first six months of 2017, it is only natural for stock market investors to wonder if we’re due for some type of correction. But more often than not, strength in the year’s first half begets more strength in the second half. We have just a month of evidence, but this proved true in July, with most major markets recording further gains. The S&P 500 was up 2.06%, led by a number of good earnings reports. More impressive were markets outside of the U.S. International and Emerging Market equities that delivered gains of 2.88% and 5.96%, respectively.
QUARTERLY MARKET COMMENTARY : Second Quarter 2017
As we enter the second half of the year, the U.S. economic expansion is now in its 97th month, the third longest on record. For comparison, the average expansion since 1900 has lasted just shy of four years, or 47 months to be exact. Given how far beyond that average we currently are, a natural inclination is to wonder just how much longer this can go on. Aren’t we due for a recession or some type of pullback? Not necessarily in our opinion. In fact, when looking at the length of historical business cycles, there has been a substantial increase in their typical duration as the economy has matured. For example, the average length of the 18 expansions from 1900 – 1980 was a mere 36 months. But what about the five cycles from 1980 through the present? 76 months. From that perspective, our present situation doesn’t seem near as worrisome. Economists often refer to these types of differences as a “regime change.” More specifically, a regime change is a distinct shift in the characteristics of certain economic phenomena in one time frame compared to a previous one. In this case, business cycles have evolved from stronger, but briefer expansions, to cycles that may now be more-muted, but longer lasting. None of this is to say that the business cycle is dead, or we needn’t worry about another recession – neither is the case, no matter how badly central bankers wish it was. Thus, it’s not simply the passage of time itself, but rather the strength, or lack thereof, for economic fundamentals.
Halfway through 2017, and it’s been mostly good news for financial markets. The S&P 500 is up 9.34 percent already, and the technology-heavy NASDAQ has gained 14.71 percent. After years of subpar returns, international markets have come to life as well, with the MSCI EAFE and MSCI Emerging Markets rising 13.81 percent and 18.43 percent, respectively. The Federal Reserve increased the federal funds rate another quarter-point at their last meeting, and also hinted at potentially shrinking the size of its balance sheet later this year. So far though, this has had little effect on longer-term bond yields. At 2.27 percent, the 10-Year Treasury Yield is still much closer to its yearly lows than to its high of 2.61 percent back in March.
International stock markets continued their solid performance in May, buoyed by an improving European economy and favorable results in the recent French presidential election. The MSCI EAFE Index was up 3.67 percent for the month and has gained an impressive 14.01 percent for the year. Though the political environment here in the U.S. is rather hectic presently, it hasn’t put a damper on financial markets. The S&P 500 rose 1.41 percent in May and is up 8.66 percent year-to-date. More important than any news out of Washington is the fact that companies are enjoying solid earnings growth. With most of the first quarter data reported, it looks like this was the best yearly increase in profits since 2011.
Technology stocks have been some of the best performing assets so far in 2017, helping propel the NASDAQ Index above the 6,000 level for the first time. On the year, it is already up an impressive 12.71 percent. The more diverse S&P 500 has also enjoyed early success, gaining 7.16 percent through April. Overseas, Emmanuel Macron and Marine Le Pen secured enough votes in the first round of France’s presidential elections to move on to a run-off in early May. Macron is expected to prevail, which is likely the most market-friendly outcome. International stocks were up 2.54 percent for the month and nearly 10 percent year-to-date. Despite the Federal Reserve’s desire to continue interest rate raises as the year progresses, there has been relatively little movement in fixed income market’s lately. High-yield bonds continue to perform well though, and returned 1.15 percent in April.
QUARTERLY MARKET COMMENTARY : First Quarter 2017
“The optimist sees the donut, the pessimist sees the hole,” so said eminently quotable Irish writer Oscar Wilde with respect to how people can view the same future through differing perspectives. And despite the purchase of the iconic, North Carolina-based donut-maker Krispy Kreme by German investors last year, hope is springing eternal in the U.S. On the business side, CEO confidence measures are hitting levels not seen since 2006. Also, small and mid-sized firms are increasingly encouraged about business conditions going forward. The NFIB Small Business Optimism Index stayed above 105 for three straight months, easily the best readings during this economic cycle. This compares to a long-term average of 98 and a post-financial crisis mean of just 94. Not to be left out, the American consumer’s outlook has taken a turn for the better. Consumer Confidence, as reported by The Conference Board, recently hit 125.6, the highest since late 2000.
U.S. stock markets were little changed in March with the S&P 500 up just 0.12% and the small cap Russell 2000 about the same, registering a 0.13% gain. The Federal Reserve’s interest rate increase coupled with the White House’s failure to get new healthcare legislation passed tempered investor’s enthusiasm for equities, especially after such a strong rally over the past three months. Market participants will now likely shift their attention toward potential corporate tax reform. Despite muted U.S. returns, international markets continued their ascent. International developed and emerging markets were up 2.75% and 2.52% for the month. Bond yields have been relatively range bound, with the 10 year treasury yield oscillating between 2.40% and 2.60%.
Historically, the first February under a new President has been a poor one for stocks. Not so this year, as post-election momentum propelled markets to fresh highs. The S&P 500, Dow Jones Industrial, and NASDAQ were up 3.97%, 5.17%, and 3.91%, respectively, for the month. Emerging market equities have been a top performer so far, up 3.06% in February and 8.70% already on the year. Bond investments had a rough end to 2016, as quickly rising interest rates led to selling of fixed rate investments. These securities have rebounded through the first two months of 2017, though, with municipal bonds up 1.45%, and high yield bonds rising 2.93%. On the docket for March is a Federal Reserve meeting in which markets forecast a better than 50% chance of another rate increase.
Stock markets started off on the right foot in 2017, with most major markets registering solid performance in January. The S&P 500 increased 1.90 percent, and strong technology stocks propelled the NASDAQ to a 4.35 percent gain. International markets were generally laggards in 2016, but that trend reversed this past month. The MSCI EAFE and MSCI Emerging Markets rose 2.90 percent and 5.47 percent, respectively. In fixed income markets, high yield bonds were the place to be, as they have returned 1.45 percent already this year. There were no changes to monetary policy after the most recent Federal Reserve meeting, so investors will sharpen their focus on potential governmental policy changes as the new administration settles in.