Broker Check

2017 Mid-Year Review Newsletter

| July 26, 2017
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First Half of 2017 Market Recap

The S&P 500 and Dow Industrials both extended their quarterly gains to post their strongest first-half performances in since 2013. Technology (+17.23%) and Healthcare (+16.07%) led the six month broad market advance, but both sectors have recently given back gains.

Equity markets have remained largely resilient even as investors faced valuation concerns, a June 14 Federal Reserve rate hike to 1%-1.25% (its second one quarter point hike this year), and a mixed bag of economic data.

Beyond an overhang of geopolitical risks, Wall Street has also been disappointed by a lack of legislative success to enact tax and healthcare reform or infrastructure stimulus measures.

On a brighter note, in the closing days of the quarter, investors learned that all 34 of the largest U.S. banks passed their Federal Reserve financial stress tests and consequently approved their respective quarterly dividend increase requests and stock buyback plans.

Moreover, the final of three readings of GDP growth for the first quarter was revised higher to 1.4% from 1.2%, and double the 0.7% initial estimate. By market capitalization, U.S. small cap companies outperformed large and mid-caps last month; but trail them on a quarterly and year-to-date (YTD) basis.

At-A-Glance 

  • The S&P 500 posted its sixth straight monthly gain and had its best first-half performance since 2013.
  • U.S. oil prices sank into a bear market in June, down as much as 23% from its January peak, but recently ended five weeks of declines by advancing 8.3% over the last seven sessions in June.
  • Foreign equity markets widely outperformed the U.S. in the 2Q and during the first-half of 2017.
  • YTD basis, small cap stocks rose 5%, mid-caps gained 8%, while large cap S&P 500 stocks advanced 9.34%.
  • Value-oriented stocks likewise outperformed growth stocks in June, while growth outperformed in the second quarter and during the first half.
  • Within the S&P 500 Index, 5 of the 11 major sector groups advanced in June, with Financials (+6.43), Health care(+4.62%) and Real Estate (+1.92%) gaining the most.
  • Telecom (-2.92%) and Technology (-2.70%) led among June decliners. For the quarter, Healthcare (+7.10%) and Industrials (+4.73%) led all sectors, while Telecom (-7.05%) and Energy (-6.36%) fell the most.
  • The Stoxx Europe 600 Index fell nearly 1% in June but gained 7.96% and 16.39% respectively in the second quarter and YTD.

Look Ahead to Rest of 2017

With the Standard & Poor's 500 reaching record highs after an eight-year bull market, the Federal Reserve Bank raising interest rates, and high stock valuations, strategists must be worried about the stock market, right? Not so much. 

As we move into the second half of the year, fund managers and equity analysts try to find reasons for optimism, despite growing valuation concerns. They continue to recommend a large allocation to equities. Clearly, the high valuations of U.S. stocks have not yet posed much headwind to robust market gains. We believe these returns reflect recent strong year-over-year earnings growth, a low inflation and interest rate environment, generally improving global economic data, continuing highly accommodating global monetary policy, and continuing optimism that corporate tax reform would be imminent. 

The likelihood that some of these positive factors will begin to fade before year-end supports our outlook that the ongoing bull market will be accompanied by rising risks. In particular, year-over-year comparisons for earnings will soon become more challenging at the same time that expectations have risen to potentially excessive levels. Given that global economic activity was already reasonably robust at the end of 2016, optimistic year-over-year growth forecasts may prove challenging to meet. 

If Q4 earnings estimate decrease, it could lead to some market volatility in the second half of the year. Should the solid macro foundation provided by these factors begin to erode, the risk versus reward outlook for equities would become far less favorable.  

Summary of Changes for our Clients' Portfolios  

The U.S. has led the global markets for the past several years, but there are signs of change. While we would be mindful of the impact of currency and valuation, opportunities still exist outside the U.S., and we continue to recommend a globally diversified portfolio. We would continue to be wary of the more interest rate sensitive sectors such as utilities, staples, and telecom. 

Turning to the bond market, despite two recent rate hikes by the Federal Reserve, we have actually seen the much-watched 10-year Treasury yield fall about 50bps to about 2.15% so far this year. In the short-term, we do not see many factors that would move rates materially higher or lower. At the beginning of the year, we had expected the yield on the 10-year Treasury to finish 2017 between 2.75% to 3.25%. With the recent fall in rates and weaker inflation numbers, we expect yields to finish closer to the lower end of this range now, with 10-year yields possibly staying below 3% for 2017. 

From a portfolio implementation standpoint, we continue to prefer fund managers with flexible investment styles that provide discretion and the ability to move within their mandates when faced with the changing circumstances that we should anticipate going forward. 

As always, it's best to treat these predictions with caution. Part of our jobs as financial advisors is to stress the importance of being comfortable with your portfolio. One of our main goals is to help you accumulate wealth without taking on undue risk. Markets rise and markets fall, but unless there have been changes in your circumstances or you have hit milestones in your life such as retirement, stay with the plan. By itself, a long run in stocks is not a good reason to bail out of the market. Be comfortable with the level of risk you're taking as we set out to meet your objectives and overall financial goals. 

Please contact us and let us know if major changes have happened or are about to happen in your life. We want to make sure that we are meeting our clients' expectations and part of that is making sure their financial portfolios match up with their overall goals.

David Hanson & Carl Hanson, CFP®

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