Following the strong start to the year, additional positive performance slowed in the second quarter as markets digested a tremendous amount of economic and geopolitical news. However, despite elevated levels of uncertainty throughout global financial markets, returns overall remain robust year-to-date. A few highlights from the second quarter:
• U.S. Equity markets added to gains from earlier in the year at a slower pace as compared to the first quarter. Economic data was mixed and overall GDP results fell short of expectations. Despite uncertainty, corporate earnings were stronger than anticipated which helped push equity markets to new highs.
• International equity markets were positive during the quarter and outperformed their domestic counterparts. Economic data in Europe continues to come in better than expected, and could be signaling a period of sustained growth. Emerging Market equities posted some of the strongest gains of all in countries such as China, India, and Brazil, which continue to accelerate. Emerging Market stocks are the best performing asset class year-to-date.
• After a steep increase in interest rates to end 2016 and after only the third increase in short-term rates by the Fed since the Financial Crisis, interest rates were generally stable to declining during the second quarter. Declining rates helped prices of Core U.S. Bonds which more than doubled their return from the first quarter. Investors continued to embrace risk in fixed income markets as High Yield Bonds, International Bonds, and Emerging Market Bonds outperformed Core U.S. Fixed Income.
• The only negative returns for the quarter came from commodities, mostly as oil prices suffered volatility and ended the quarter below where they began. Energy prices continue to be buffeted by
macro-economic developments and particularly by rhetoric from OPEC about continuing production cuts currently in place. In contrast to falling commodity prices overall, Global Real Estate
had a strong quarter and, similar to fixed income and equities, International Real Estate handily outperformed U.S. Real Estate.
An important Lesson from the second quarter:
• Typically, when the economy is strong, stocks tend to do well, pushing prices higher while interest rates are also rising and pushing bond prices lower (bond prices and yields move inversely to one another).
However, throughout the second quarter, both equity prices and bond prices moved higher; a result rarely seen. There has been much speculation about what is causing this unique dynamic. The reality is, it is nearly impossible to pinpoint causes of financial market performance over short periods of time. It’s like predicting the weather. It’s impossible to know what the weather will be like 2 Tuesdays from now, however, what we do know is that it will be colder in January than it is in July. This is why we take a strategic approach to investing and avoid trying to time markets. We set a strategic target asset allocation plan for portfolios and adjust that plan at least annually to take advantage of valuation opportunities in markets as they ebb and flow over time. This latest episode in the market is just another illustration of the fact that markets can produce irrational results over short periods.