In a Nutshell
- The Fed raised interest rates another 0.25%
- U.S. and International stocks continued their strong performance
- Stock volatility around the world is at historically low levels
U.S. Stocks – Too Calm?
U.S. stocks, especially larger companies, continued their strong performance for the year. And they are doing so in one of the calmest markets in history. According to LPL, the largest pullback this year has been 2.8%. If this holds the rest of the year, you’d have to go back to 1995 for a year that had a lower peak-to-trough move. (Source: LPL Financial Research)
Like the hero would quip in countless Saturday matinee westerns just before the outlaws showed up, some investors are saying “It’s quiet…too quiet.” Their expectation is that instead of just resuming it’s normal level of volatility, this market’s unusually calm behavior is going to be broken by a sharp selloff. Time will tell. (Source: Business Insider)
Through the first half of the year, large growth stocks are showing the best performance, up 14% to date. From a sector perspective, Technology (up 17%) and Health Care (up 16%) have led the way. On the flip side, Energy and Telecom stocks continue to struggle as both sectors are down 10% or more. There is an old Wall Street saying –
“Success in the market is as much about what to avoid as what to be invested in”
So far this year that has been the case.
International Stocks – Recovery Continues
International stocks, in both emerging and developed markets, continued to be best performing asset class this quarter and this year. And there is a solid case that this outperformance may continue for some time.
In addition to reasons discussed in our 1st Quarter Review, many international economies took years longer to emerge from their recessions compared to the U.S. and so they are not as far along in their recoveries. Earnings for international companies have also markedly improved over the past year and expectations are they will continue to do so.
And overseas markets have been calm as well. It’s very rare for the U.S., Europe, Japanese and emerging markets to all have low volatility. (Source LPL Financial Research)
Bonds – Paddling Against the Current
U.S. government and high quality corporate bonds made solid returns in the quarter. This despite the Federal Reserve continuing its planned path to ‘rate normalization’, a fancy way of saying they will continue to raise rates until they are back to historically normal levels. (I was always told never to use the word being defined in the definition so hopefully no one reading this is an English teacher.)
Anyway, the Fed did increase the Fed Funds Rate another 0.25% in June, it’s 2nd such move this year. The rate now stands at the 1.00% – 1.25% level. Fed chair Janet Yellen stated earlier this year that she expected 3 rate increases in 2017 and another 3 moves in 2018. She also stated that barring any significant changes to employment or inflation, the rate should stabilize at 3% by the end of 2019. (Source: Federal Reserve)
Like trying to paddle a canoe upstream, this slow and steady increase in interest rates will continue to be a drag on U.S. government and high quality corporate bonds for the next couple of years. However, as I’ve said before, conservative investors shouldn’t abandon bonds altogether as they typically smooth out portfolio ups and downs. And they should consider diversifying their bond allocation to include securities that aren’t as sensitive to rising interest rates.
Commodities and Alternative Assets
Commodities as a whole continued their poor performance this quarter, with the broad commodity measures down another 3%. Looking closer, oil is in the middle of it’s $45-$55 trading range and precious metals continue to fluctuate.
Agricultural commodities such as wheat, corn and soybeans have been in a multiyear downtrend. This has been great for those of us who like to eat but much tougher on grocery stores and farmers. (Sources: USA Today & Marketplace)