Market Monitor & Recap

Market Recap

2nd Quarter Recap and Outlook – March 31, 2017 to June 30, 2017


With half of 2017 in the books, we take a look back on the accuracy of predictions we made for the year. Our prognostications were predicated upon the deregulation and tax reform that we perceived would quickly come from Washington, stronger corporate earnings, and the continued momentum of growing animal spirits. This economic and political outlook resulted in us making two core portfolio decisions: to maintain a duration shorter than the benchmark and be overweight equities. Congress’ legislative shortcomings, were the greatest shortfall of our outlook for 2017, as investors revised growth and inflation projections downward. As a result, interest rates didn’t begin to move toward our expectations until the end of the quarter, a little later than we anticipated. Our overweight position in equities since the beginning of the year proved to be correct, which added more value to our portfolios relative to bonds. 

During the 2nd quarter, inflation and employment data came in below expectations, driving down the long end of the yield curve. In spite of the weaker data, interest rates at the front end of the yield curve, which are more tied to monetary policy, increased as the Federal Reserve continued to assert its view that policy normalization, i.e. higher interest rates, is appropriate given the maturity of the current economic cycle. The move in long-term interest rates lower resulted in the Bloomberg Barclays Aggregate Index returning a solid 1.45% during as the 2nd quarter. Corporate credit was again the best performing fixed income segment. During the quarter, the global reach for yield due to lower long-term interest rates compressed credit spreads to their lowest level since 2014.

Equities performed well during the 2nd quarter, considering the disappointing economic data and Washington’s incapability of making legislative progress. With the S&P 500 returning 3.09% during the quarter large cap equities continued to outperform both small and mid-cap equities, which returned 1.71% and 1.97%, respectively. Over the last 12 months our sector diversification has benefited our clients' performance. During the 2nd quarter our portfolios benefited from an overweight in technology as well as our overweight position in Whole Foods Market, which was acquired by Amazon in mid-June. According to our analysis, the equity market is likely to remain stable over the coming months, which led us to decrease the equity allocation of our balanced portfolios to neutral towards the end of June.


It is our expectation that the U.S. Economy will perform modestly throughout the 3rd quarter, with the possibility of growth, and especially inflation surprising to the upside. It is of our belief that it will prudent to have a neutral equity allocation going into the quarter. Even though we expect the stability and strength of corporate earnings to persist over the coming months, we would require confirmation of such and low volatility before adding additional exposure to equities. The lower bound of the range of the price of crude oil will continue to be a focus of investors, and we believe that above-trend growth in Europe and Asia will raise demand for energy, pushing up prices, and bringing the supply and to equilibrium.

Though we think equities as an asset class will. have a mediocre quarter, we believe that within the asset class value stocks will outperform their growth peers. We perceive that investors will take a refrain from investing in fully valued companies with high growth potential, which have performed remarkably since the beginning of 2017. Currently, we find the value within the consumer staples and financial sectors the most appealing. We are also specifically optimistic about the prospect of financial stocks, especially large U.S. banks, which will continue to benefit from the rollback of excessive and burdensome regulations. In addition, the positive results of the most recent stress test on banks, which determines the ability of banks to withstand an economic shock, raises the potential for capital to return to investors in the form of higher dividends.

The Federal Reserve’s resolve to normalize interest rates in the face of moderating job gains, weaker inflation, and investor disagreement over the appropriateness of such policy, presumably points to one more interest rate hike during the 4th quarter. The Federal Reserve is likely to begin to reduce the amount that it reinvests in treasuries and agency mortgage-backed securities during the end of this year, which will put upward pressure on the intermediate and long-end segments of the yield curve. As the Federal Reserve begins to reduce its balance sheet, we see potential for agency mortgage-backed securities, as the spread on these securities should widen adding more attractive compensation compared to treasuries and corporate bonds. In addition, we see limited room for credit spreads to tighten further from their current multi-year low, and expect spreads to level off over the coming quarters.


Media Perspective

A recent article from the Wall Street Journal, Stocks Ring Up a Solid First Half  - S&P 500 posted its strongest first half of a year since 2013. (By Corrie Driebusch and Riva Gold, Wall Street Journal)

Read More of Corrie Driebusch and Riva Gold article at the Wall Street Journal online.

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