Market Recap Third Quarter 2017

In a Nut Shell:

  • The third quarter close represented eight straight quarters of gains for global equities and the ninth positive month for the S&P 500 in 2017.
  • International Developed and Emerging Markets led the charge from a total return standpoint – we continue to emphasize these areas in our portfolios.
  • Growth stocks outpaced Value stocks across the globe – a complete reversal from 2016.
  • Two sectors driving growth outperformance: technology and health care.
  • Bond returns were positive, if unspectacular. Even unspectacular deserves celebration in light of recent rate hikes.
  • Rising crude oil prices contributed to a boost in commodities for the quarter.

Goldilocks Is Getting Some Serious Shuteye

The Investment Environment: Too Hot, Too Cold or Just Right?

The investment industry loves to talk about the “Goldilocks” economy or market.  The phrase is typically used to describe the ideal investment environment in which the economy and markets are performing well enough, but not so well as to create a bubble.  The longevity, consistency, and recent strength in equity markets has many investors wondering how long Goldilocks can keep napping before those pesky bears come home!

  

The third quarter of 2017 was not only the eighth straight quarter of gains for global equities, but it also closed with the ninth positive month for the S&P 500 Index this year (note the S&P 500 has never been positive every calendar month for a full year in its 91 years of existence).  This, despite plenty of geopolitical drama and tension.  To this point, those geopolitical concerns have been more than offset by the positive economic and earnings momentum happening in a synchronized fashion across the globe. This is illustrated in the graph below that shows the MSCI USA, Europe, Japan and Emerging Markets (EM) each showing upward trends.  

As mentioned, equities continue to be the clear winner - not just for the past quarter, but also on a year-to-date and 12-month basis.

International Developed and Emerging Markets

International Developed and Emerging Markets lead from a total return standpoint and are areas we continue to emphasize in our portfolios.  It should be noted, however, that the returns on the international side have come not only from the stocks themselves, but also from currency.  After a number of years in which the dollar appreciated (which hurts returns for a U.S. investor investing abroad) that trend has reversed and significantly added to returns.  It’s worth noting that in the year or two leading up to this currency reversal many investors, tired of the currency headwind, switched to a currency hedged approach which means they did not enjoy the positive impact this year (and worse, locked in the losses from having ridden the currencies all the way down previously).  Our approach and philosophy remains the same – we do not and will not hedge against the currency. 

Growth and Value Stocks

Another significant difference in performance, regardless of geography, can be seen between growth and value stocks.  Growth has handily outpaced value across the globe.  To be fair, this is a reversal of what happened in 2016, but the differences are clearly significant.  In the U.S., two of the sectors driving that growth outperformance have been technology and health care, areas we have targeted allocations to for a number of years.  We do still own portions of value stocks in both our U.S. and International strategies, which has offset some of the sector and style contribution.

Bonds

Bond returns were positive though unspectacular.  Given that we’ve had multiple rate hikes by the Federal Reserve this year and a commitment by the Fed to interest rate and balance sheet “normalization” (whatever that might mean!), an unspectacular positive is probably worthy of a small celebration:  a positive development, but not worth getting too carried away with for fear of jinxing it!

Commodities

After a difficult second quarter, commodities experienced a modest recovery on the back of energy prices.  WTI Crude Oil ended the quarter north of $50 after dipping to the low $40’s in mid to late June.  Commodities remain slightly negative on the year and while the category’s volatility has fallen significantly from 2015 and 2016, it still far outpaces that being experienced in either equities or fixed income. 

For questions about the temperature of the current investment climate, please contact Brad Swinsburg 404-874-6244.   

Explore more information on the third quarter of 2017 by visiting these links:

Market Outlook Third Quarter 2017

On the Horizon: Six Focus Areas

A Deeper Dive - Is 3% GDP Growth Sustainable?

Summary: Third Quarter 2017

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.