Market Recap: Calm and Yawns Amid Continued Gains
Relative calm and near complacency dominated markets during the 2nd quarter. There was no shortage of drama geopolitically, but both stock and bond markets continued to yawn and move higher. There were also no big revelations economically, although growth continues to accelerate nicely internationally and optimism for renewed GDP growth here at home persists despite limited hard evidence.
While the optimism surrounding renewed US growth prospects as a result of actions in D.C. may be showing some cracks, the actual earnings results (shaded blue area of below chart) reflect a nice recovery and acceleration from the drop experienced in late 2015/early 2016. Those earnings have still not returned to 2014 levels though, yet the market continues to reach new highs (grey line of chart).
All that led to gains from both equities and bonds during the quarter. On the equity front, international and emerging markets continued to lead the way as they did during the 1st quarter. While there is a noticeable difference between the US and international arenas so far this year, the prior 12 month period (July 2016/June 2017) shows that investors have enjoyed strong equity returns globally. Year to date, there has also been a rather stark difference between growth and value styles with growth handily outpacing value across the globe. This is a reversal from the prior year in which value stocks led the way. From a sector standpoint here in the US, Healthcare and Technology (two areas we’ve emphasized in portfolios) led returns while Energy and Telecom were the only negative sectors both for the quarter and year.
Bond returns were positive if not unspectacular. Given the fear around rising rates, this is likely a somewhat surprising result to many market participants. Despite another Federal Reserve rate hike and discussion around their balance sheet reduction later this year, longer maturity bonds have really not moved. Credit spreads and quality were also relatively stable during the quarter allowing investors to continue enjoy clipping their coupons and waiting for any day of reckoning that would occur should either rates rise or credit spreads widen.
The one negative outlier among the major markets was in commodities. To be fair this is an area that had a strong 2016, so the weakness could be a retracement of part of that rally. It is also mostly a reflection of what occurred with energy prices as the index used for our graphic is the S&P GSCI which is heavily weighted toward energy. As many may recall, oil prices bounced from a low of around $26 in early 2016 to the mid $50s earlier this year. While still well off the lows of 2016, oil levels have dropped back to the low/mid $40s at quarter end. The weakness has been driven by the increase in oil production and the sustained high levels of oil already in storage. Not surprisingly the pullback in energy prices has resulted in a similar pullback in energy related equities as that is the worst performing sector in the S&P 500 for the year.
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Unless stated otherwise, any estimates or projections (including performance and risk) given in this presentation are intended to be forward-looking statements. Such estimates are subject to actual known and unknown risks, uncertainties, and other factors that could cause actual results to differ materially from those projected. The securities described within this presentation do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that an investment in such securities was or will be profitable. Past performance does not indicate future results.