Global equity markets rose 4.5% during the second quarter, as measured by the MSCI ACWI Index, while the Bloomberg Barclays Global Aggregate Bond Index posted a 2.6% return.1 International markets found firmer footing alongside the US on increased manufacturing and global trade, with global economic growth expected to accelerate to 2.7% in 2017 and 2.9% in 2018-19.Some more text with a footnote.2 At the same time, foreign currencies rallied against the US dollar in 2017, which boosted returns for international investments. For the first half of 2017, global stocks returned 11.8%, with international stocks up 14.5%... the best start to a year since 1998.
The S&P 500® Index returned 3.1% for the quarter and 9.3% year-to-date. Large-cap stocks outperformed smaller caps, with multinational companies benefiting from their broader global reach. Health Care led all sectors with a 7.1% return, with new government legislation expected to be favorable for hospitals, health insurers and drug makers. Energy stocks declined 6.4% on higher US crude inventories, as oil prices moved into “bear market” territory with prices down 20% from their recent peak. The more defensive and higher dividend sectors such as Telecom, Utilities and Consumer Staples trailed higher growth areas, including Technology.
The MSCI ACWI ex-US Index of international stocks rose 6.0% during the quarter and beat US stocks. Foreign currency appreciation was a large driver of performance, as international stocks returned 3.5% in local market terms. European stocks benefited from several developments, including growth in corporate earnings, positive readings on economic sentiment and reduced political uncertainty following the French election. The Asian region was lifted by Japan with supportive policy and lower taxes contributing to a brighter economic outlook. Emerging markets returned 6.4%, with larger gains from technology stocks in China and South Korea.
In fixed income, the Bloomberg Barclays US Aggregate Bond Index returned 1.4% during the quarter, as uncertainty around Trump pro-growth initiatives contributed to lower yields and larger gains for longer-term bonds. Corporate and high-yield bonds benefited from the favorable economic backdrop as credit spreads tightened. Lower readings on inflation hurt Treasury Inflation-Protected Securities (TIPS) - one of the few bond sectors to finish down for the quarter. International bonds rose largely due to the appreciation in the euro and British pound versus the US dollar, even as rates rose with central banks hinting at tighter monetary policy.
The final reading on first quarter US gross domestic product (GDP) came in at 1.4% - up from earlier estimates - based on stronger exports and higher consumer spending.Some more text with a footnote.3 The Federal Reserve Bank of Atlanta forecast that GDP rose 2.7% during the second quarter, even as recent estimates have been cut back due to lower auto sales. Corporate earnings are expected to grow 6.6% in the second quarter according to FactSet, led by a rebound in the energy sector. Analysts are projecting year-over-year earnings growth for nine of the eleven S&P 500 sectors, including a 10.5% increase for Technology. The Utilities and Consumer Discretionary sectors are expected to see small declines in earnings.
The Federal Reserve increased short-term rates by 0.25% to 1.00%-1.25% at the June 2017 Federal Open Market Committee meeting - the fourth increase since December 2015. The unemployment rate was 4.4% in June, below the Fed’s longer-term target of 4.5%-5.0%. The Consumer Price Index (CPI) inflation rate rose 1.9% for the 12-month period through May, but has decelerated in recent months due to lower energy prices. Core inflation (excluding food and energy) increased 1.7%, which alongside other measures, was below the Fed’s preferred 2% policy target.Some more text with a footnote.4 Fed Chair Janet Yellen indicated that the recent decline was temporary, attributable to cheaper cell phone plans and prescription drugs.
Currency moves were a big driver of investment results during the first half of 2017. Following a strong six-year run, the US dollar declined 6.6% versus the broad basket of international currencies.Some more text with a footnote.5 For US investors with exposure to international markets and foreign currencies, this provided a strong tailwind versus previous years - when foreign currency exposure detracted from investment returns. Notably, the S&P 500 outperformed international stocks every year from 2012 to 2016. Despite the cyclical trends, currencies tend to revert over longer horizons, so this year provides a good reminder to remain globally diversified.
Low volatility continued to be a key theme across multiple asset classes, and supported steady gains for stocks. The frequently-referenced CBOE Volatility Index (VIX) on US stocks declined to 9.37 in early June - testing its all-time low of 9.31 achieved in December 1993. Nonetheless, the market’s calm was interrupted briefly on May 17th as news of President Trump’s potential interference in an FBI investigation drove the VIX from 10.65 to 15.59 in a single day (a move of 46%). While the market returned to its peaceful state, the move highlighted the potential for unexpected catalysts to drive swift moves across markets.
The strong run for stocks is now in its ninth year, dating back to March 2009. A reasonable case could be made that we are in the later stages of the bull market cycle, with the global economic recovery firmly in place and central banks indicating a shift away from accommodative policies. The timing of market tops and bottoms is inherently difficult; however the prudent approach is to remain diversified across asset classes and strategies. Core market allocations to stocks and bonds serve to provide a solid portfolio foundation, while tactical and diversifying strategies allow for additional flexibility to enhance results within a diversified investment solution.
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Summit Group of Virginia
This material was prepared by Asset Mark and does not necessarily represent the views of the presenting party, nor Ameritas Investment Corp. (AIC). Asset Mark is not affiliated with the presenting party or AIC. This material represents an assessment of the market environment at a specific point in time and is not intended to predict future results. The performance mentioned herein is past performance and is not indicative of future results. All information is gathered from sources believed to be reliable; however we make no representation as to its completeness or accuracy. Market indices are unmanaged and cannot be invested into directly. Neither the presenter nor AIC are providing tax or legal advice. Please consult your tax advisor or attorney regarding your situation.
1. Unless otherwise indicated, all index returns are from FactSet↩
2. Source: The World Bank. "Global Economic Prospects: A Fragile Recovery (June 2017)"↩
3. Source: Bureau of Economic Analysis↩
4. Source: Bureau of Labor Statistics↩
5. Source: Bloomberg, US Dollar Spot Index↩