facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast blog external search
%POST_TITLE% Thumbnail

Q2 2017 Market Commentary


By Ritika Puri, Director of Portfolio Strategy, Loring Ward

Global stock markets delivered robust gains in the second quarter of 2017 as stronger earnings growth, upswings in global economic data and diminished political uncertainty in Europe all supported risk appetite. International stocks led the way with non-U.S. developed markets, as measured by MSCI World Ex US, up 5.6% and MSCI Emerging Markets up 6.3%, while the S&P 500 rose 3.1%.

In the U.S., the Federal Reserve raised its benchmark rate by 25 basis points in June, moving its target range to 1.00-1.25%, and spelled out in greater detail its plans to start slowly shrinking its $4.5 trillion balance sheet accumulated in the years after the market downfall of 2008. During the quarter, interest rates rose in the short end of the yield curve while longer rates fell. The yield on the benchmark 10-year Treasury note declined 9 basis points to end the quarter at 2.31%.

The U.S. Dollar Index (measure of the value of the United States dollar relative to a basket of foreign currencies), fell sharply, about 3.7% for the second quarter.

U.S. Economic Review
Domestic economic data continued to plug along at a healthy, if not exciting, pace. First quarter GDP increased at a 1.4 % annual rate, helped by unexpectedly higher consumer spending and a bigger jump in exports. U.S. jobless claims continued to trend lower signaling a tight labor market. The unemployment rate in May declined to a 16-year low of 4.3 %. Despite the big decline, wage growth has been relatively tepid. The Fed’s preferred gauge of overall inflation, the core Personal Consumption Expenditures (PCE) index, rose just 1.4% in May from the prior year.

Survey-based measures, such as the Institute for Supply Management (ISM) manufacturing index, rose to 57.8% in June — the highest reading since mid-2014, providing some encouraging signs of the overall health of the U.S. economy.

Sources:  Bureau of Economic Analysis, Bureau of Labor Statistics, Bloomberg Economic Calendar, U.S. Department of the Treasury, Institute for Supply Management, Morningstar Direct 2017.

Financial Markets Review
U.S. stock indexes rose to new highs with Healthcare stocks leading the way. Oil prices had a volatile quarter on concerns about higher-than-anticipated global supply. As a result, declining crude oil prices weighed on energy stocks. International stocks in the Developed Value and Small areas as well as Emerging Markets also saw significant gains. Bond prices moved higher, boosted by strong demand and possible waning concerns about inflation. Barclays U.S. Aggregate Bond Index and BofAML US Corp & Govt 1-3 yr index rose by 1.4% and 0.3% respectively.

Source: Morningstar 2017. Market segment (Index representation) as follows: U.S. Large Cap Stocks (S&P 500 Index); U.S. Small Cap Stocks (Russell 2000 Index), U.S. REIT Stocks (Dow Jones U.S. Select REIT Index), U.S. Value Stocks (Russell 1000 Value Index). International Small Cap Stocks (MSCI World Ex USA Small Index (net div.)), International Value Stocks (MSCI World Ex USA Value Index (net div.)), Emerging Markets Value Stocks (MSCI Emerging Markets Value Index (net div)), Global 1-5 Year Bonds (Citi WGBI 1-5 Yr Hdg U.S.D), U.S. Gov/Credit 1-3 Year Bonds (BofA ML Corp&Govt 1-3 Yr TR).

In the U.S., Large Growth stocks led the way in performance during Q2, with both Large and Small Core positive but advancing less than Large and Small Growth companies. Over the last 15 years, Small Core outperformed their Large counterparts, with Value marginally trailing Growth in the Large Cap space.

Source: Morningstar Direct 2017. U.S. markets represented by respective Russell indexes for each category (Large: Russell 1000, Value, and Growth, Mid: Russell Mid Cap, Value and Growth, Small: Russell 2000, Value and Growth).

Internationally Small Growth stocks led the way in performance during Q2, with both Large and Small Core positive but advancing less than Large and Small Growth companies. Over the last 15 years, Small Core has outperformed their Large counterparts, with Value marginally trailing Growth in the Large Cap space.

Source: Morningstar Direct 2017. International markets represented by respective MSCI World EX USA index series (Large: MSCI World EX USA Large, Value and Growth, Mid: MSCI World Ex USA Mid, Value and Growth, Small: MSCI World Ex USA Small, Value and Growth).

More aggressive models saw greater performance than more conservative models because of the higher returns in stocks compared to bonds. A diversified index mix of 65% stocks and 35% bonds would have returned 2.3% during the second quarter.


65/35 Index Mix:  2% Cash (BofAML 3M US Treasury Note TR USD), 16% ST US Bonds (BofA ML Corp & Govt 1-3 Yr TR), 17% Global Bonds (Citi WGBI  1-5Yr Hdg USD), 15% US Large (S&P 500 Index), 12% US Value (Russell 1000 Value Index), 8% US Small (Russell 2000 Index), 4% US REITs (Dow Jones U.S. Select REIT Index), 14% Intl Large Value (MSCI World Ex USA Value Index (net div.)), 7% Intl Small (MSCI World Ex USA Small (net div.)), 5% Emerging Markets Value (MSCI Emerging Markets Value Index (net div)).

Indexes are unmanaged baskets of securities that are not available for direct investment by investors. Index performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Foreign securities involve additional risks, including foreign currency changes, political risks, foreign taxes, and different methods of accounting and financial reporting. Emerging markets involve additional risks, including, but not limited to, currency fluctuation, political instability, foreign taxes, and different methods of accounting and financial reporting. All investments involve risk, including the loss of principal and cannot be guaranteed against loss by a bank, custodian, or any other financial institution. The risks associated with investing in stocks and overweighting small company and value stocks potentially include increased volatility (up and down movement in the value of your assets) and loss of principal.