Note: This post is an excerpt from Gould Asset Management’s Economic and Market Review for the Second Quarter of 2017. The excerpt is posted here for the benefit of our blog subscribers.
US Stocks Move Steadily Higher, Show Little Regard for Political Uncertainties
Despite increasing political turbulence, US stocks marched methodically higher in the second quarter, with the S&P 500 stock index rising 3.1% for the period. The strong gains, combined with robust first quarter returns, puts US stocks up 9.3% for the year. With the political storm at times seemingly growing by the day, the stock market’s orderly rise was a welcome and reassuring surprise to many investors.
The technology and healthcare sectors remained red hot and have now risen 14.3% and 16.0% respectively on the year. If you take just Facebook, Amazon, Netflix, and Google (now Alphabet)—known as the FANG stocks—and add Apple and Microsoft to the mix, the group has risen an average of 22% in 2017 and accounts for nearly one third of the S&P 500’s total return on the year. Gains in the healthcare sector have been equally impressive and seem to be driven by increasing skepticism among investors that significant healthcare reforms will be passed by Congress.
Large cap stocks continued to outperform mid and small cap stocks in the second quarter, as the Wilshire 4500 index rose 2.9%, compared to the S&P 500’s 3.1% gain. This continues a trend that began in the first quarter of the year and can be traced in part to the surge of some of the large technology firms mentioned above, which have a big impact on capitalization weighted market indices. A weak US dollar, which fell 2.3% in the second quarter, also boosted large-cap returns, as profits earned abroad translated into more US dollars for large multinational firms.
Market volatility readings hovered near all-time lows on the quarter, providing formal confirmation that markets were in fact as tranquil as they seemed. The VIX volatility index spent most of the quarter under 11, and even dipped below 10 on occasion—not too far off from its all-time closing low of 9.3.
International Stocks Gain, Outpace the US; Emerging Markets Continue to Deliver
International developed markets outperformed the US for the second straight quarter, with the MSCI EAFE index rising 6.4% for the period. For the year-to-date, international developed stocks have now risen 14.2%, providing some long awaited reward to investors who diversified their equity holdings across foreign markets. The robust returns were driven by a positive economic backdrop for the Eurozone, improved corporate earnings, and reduced political risk (as evidenced by centrist and pro-EU candidate Emmanuel Macron’s victory in the French presidential elections). Japanese stocks also posted good returns for the quarter.
Emerging markets maintained their momentum in the second quarter, with the MSCI Emerging Markets index jumping 6.4% on the period, making it one of the best performing asset classes in 2017 so far, with an 18.6% return year-to-date. China, the largest component in leading emerging market indexes, posted strong gains as macroeconomic data remained firm. Signs of improving global growth also benefited Korea, Taiwan, and Poland. Lest you had forgotten about Greece’s fiscal woes, the country reached another agreement with creditors, securing the release of an $8.5 billion loan tranche, sending Greek stocks soaring.
Fed Bumps Short-Term Rates Again, But Bonds Move Higher as Long-Term Rates Fall
The Fed raised short-term rates by 0.25% during the quarter, yet bond prices moved higher. The Bloomberg Barclays US Aggregate Bond index rose 1.5% on the period and is up 2.3% for the year-to-date, providing continued evidence that slow and steady short-term rate increases don’t necessarily mean bad news for the bond market as a whole.
The 10-year US Treasury yield fell from 2.40% to 2.31% on the quarter, while the 2-year Treasury yield rose from 1.27% to 1.38%. This represents a flattening of the yield curve, with short-term rates rising in conjunction with falling long-term rates. This has the benefit of helping savers who should be able to earn higher interest rates on short-term savings deposits, as well as borrowers looking to secure longer term loans, such as 30-year mortgages.
Municipal bonds posted another solid quarter, outperforming taxable fixed income investments, with the Bloomberg Barclays Municipal Bond Index rising 2.0% on the period. For the year-to-date, municipals have risen 3.6%—an excellent return considering the tax-free nature of most muni bond interest. High-yield bonds also posted another strong quarter, rising 2.2% on the period.
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