Stocks began the third quarter on a positive note. July’s market action was generally a continuation of the leadership trends of 2017. U.S. large cap stocks were the leaders within the U.S., while U.S. small cap value lagged within the U.S. equity market styles. Within large cap growth, the tech companies continued their dominance with Facebook, Microsoft, Priceline, Apple, Amazon, and Netflix leading the broad market.
International stock markets extended their positive momentum as the emerging markets led the way with Brazil, China, and India all posting strong returns. So far in 2017, international investments have been buoyed by the sharp decline in the U.S. Dollar, following three years of strengthening.
Fixed income posted modest gains. Inside the fixed income markets, higher risk sectors such as emerging market debt and high-yield bonds provided the best returns while higher quality sectors such as U.S. Treasuries lagged as longer term interest rates rose slightly and credit risk paid off.
In other sectors, commodities posted a solid return for the month after having a poor first half of 2017. The commodities rally was driven by oil which rebounded strongly in July.
The Federal Reserve left interest rates untouched in July, just as many expected. Recent Fed communications suggest that further gradual rate increases are likely and we expect a rate increase in both September and December, barring an unforeseen geopolitical event. Further, the Fed has begun to more definitively suggest that they will reduce the size of their balance sheet in the near future. In reducing the balance sheet, the Fed will effectively begin to unwind the post-financial crisis bond purchase programs that provided unprecedented monetary stimulus to the capital market system. Look for future Market Perspectives to dig deeper into the effects of Fed unwinding.
Volatility in the markets has been at its lowest levels in decades. It’s a bit cliché to suggest that volatility will increase soon. We don’t know when it will revert to more normal levels, but we do think these calm seas present a nice opportunity to rebalance portfolios, diversify abroad, and prepare for tougher times. The calm seas could remain for years or they could end abruptly.
We have been receiving the same question from many of our clients recently. The question is effectively some iteration of: “After so many years of the stock market going up, when will we see a major bear market again?” Here is our best attempt at an answer:
The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. All information, views, opinions and estimates are subject to change or correction without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. The appropriateness of an investment or strategy will depend on an investor’s circumstances and objectives. These opinions may not fit to your financial status, risk and return preferences. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Information provided is based on public information, by sources believed to be reliable but we cannot attest to its accuracy. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns. The following indexes were used as proxies in the performance tables: Global Stocks = MSCI ACWI; U.S. Large Cap = S&P 500; U.S. Large Value = Russell 1000 Value; U.S. Large Growth = Russell 1000 Growth; U.S. Small Cap = Russell 2000; Int’l Dev Stocks = MSCI EAFE; Emerging Markets = MSCI EM; U.S. Inv Grade Bonds = Barclays U.S. Aggregate; U.S. High Yield Bonds = Barclays Corporate High Yield; Emerging Markets Debt = JPMorgan EMBI Global Diversified; Int’l Bonds = Barclays Global Treasury ex US; Cash = 3month T-Bill; Sector returns displayed in the chart represent S&P 500 sectors, while treasury benchmarks are from Barclays
“In investing, what is comfortable is rarely profitable.”