Q2 2017 Economic and Market Perspective

Global equity markets ended the second quarter of 2017 higher, building on their first-quarter gains. Those gains were driven by several factors that included generally positive economic and corporate profit results in the U.S., continued confidence the U.S. government will promote more pro-business policies going forward and greater stability and growth in many international markets. For the quarter, the S&P 500 was up 3.09%, with the international equity markets up even better at 5.99% (S&P Global Ex-US BMI index). Those results were driven mostly from developed Europe.

As they did in the first quarter, growth stocks outperformed value stocks by a significant margin mostly due to the technology sector. Investors favored technology for its attractive revenue and earnings growth prospects. In contrast, plummeting oil prices dealt significant losses to the energy sector- a key component of the value stock universe.

One of the most interesting characteristics of the equity markets for the quarter was just how uninteresting they looked at first glance. Most notably, the U.S. stock market as a whole saw few significant swings as volatility hovered near multi-decade lows. In May, the S&P 500 notched 13 straight days in which it failed to move more than 0.5% in either direction on a closing basis- the longest such streak since 1995. In the entire second quarter of 2017 we saw just 2 moves of 1% which corroborates the low volatility environment.

In the fixed income markets, yields on longer duration bonds fell. The yield on the 10 year Treasury note ended the quarter at 2.298%, down from 2.386% at the start. The 30 year Treasury bond yield fell from 3.009% to 2.836%. Longer term bonds performed well due to signs the economy’s moderate pace would not lead to a spike in inflation that generally hurts bond prices.

The Federal Reserve Board also took action during the quarter, which impacted the bond market. In a widely expected move, the Fed in June raised the benchmark federal funds rate- a key short term interest rate- by 0.25% (25BPS). The Fed’s policy change helped push up the yield on short term treasury instruments. The Fed also spelled out its plan to reduce its sizable balance sheet going forward which was met with investor enthusiasm as the Fed’s plan had the appearance of taking careful and measured steps with its monetary policy. It’s noteworthy that central banks in nearly all other developed markets worldwide remain in highly accommodative modes promoting monetary stimulus, which resulted in a much more narrow dispersion of returns among international investments and sectors.

If you have any questions on this update or your investments, please do not hesitate to reach out at any time. We will continue to monitor the political and economic landscapes in both our local and overseas markets and keep you updated along the way.

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