Mid-year Market Overview: Will the rally continue?

Mid-year Market Overview: Will the rally continue?

rallyRALLY: The markets are off to a great start so far in 2017. The S&P 500 closed the second quarter with a strong year-to-date gain of 9.34% (Total return including dividends). Investors saw a market that remained resilient in the face of uncertainty and volatility was kept at bay. Corporate earnings remained strong, global economies have been improving, and major central banks across the world have continued support. Markets shrugged off repeated global terrorist attacks and a seemingly stalled presidency as a gridlocked Congress wrangled with the questions of the government’s appropriate role in the U.S. health care system.

Technology stocks and healthcare stocks have been the biggest winners so far this year. The technology index has advanced 17.2% with healthcare close behind, posting a gain of 16.1%. Coming into 2017, financial stocks were expected to play a larger role in any continuation of the rally that started with the election in November. However, we have only just started to see the rotation back into financials since they initially rallied after the election. Financial stocks are up 6.9% year to date. The two laggards for the S&P 500 this year have been energy and telecom. Energy has fallen -12.6% as we have seen oil prices dip back into the low $40’s per barrel. The Telecom sector experienced a strong rally in 2016 as investors sought out their high yields, however a rotation back into growth stocks has caused the sector to drop -10.7% this year.

International markets have finally started to outperform U.S. equities. Developed countries overseas have returned 13.81% through the second quarter as measured by the MSCI EAFE index. A revival in the European stock market has been driven by loose monetary policy and a growing global demand for European exports. Eurozone GDP growth hits its second highest level since 2011 in the first quarter, at 0.6%, while the European Purchasing Manager’s Index soared to a 74 month high in June. While U.S. stocks have soared over the last 5 years, emerging market returns have been muted. In 2017, however, investors who had exposure to emerging markets equities were rewarded with an MSCI Emerging Markets Index gain of 18.43%, almost double that of the S&P 500.

Fixed Income investors saw the aggregate bond index advance 2.27% through June. The Federal Reserve raised its key interest rate on June 14th for the 3rd time in six months, with the rate now sitting at 1.25%. In addition, the Fed announced plans of reducing its bond holdings later this year which could spur longer term rates to rise. Despite these policy moves, the yield curve has actually been flattening over the past 6 months. The 10 year Treasury Rate ended the quarter with a yield of 2.31% while the 30 year Treasury bond rate closed at 2.83%, both still significantly below long term averages.

Moving forward, second quarter earnings are going to be in focus and will be key if the market rally is to continue. Expectations for earnings are elevated, and the recent move higher in equities prices is a signal the market expects a strong quarter for earnings. The global economy is having one of its best years since 2010, with all of the world’s top 20 economies growing. Conditions for stocks continue to appear favorable with strong earnings, low inflation, and modestly growing world economies. Although we believe risks to the market are muted at this time, it is prudent to maintain a diversified portfolio. Pullbacks are to be expected, but they are healthy in any long-term bull market.

Tom Reynolds, CPA & Matt Reynolds CPA, CFP®
Co-Managing Partners, CRA Financial

Francis C. Thomas CPA, PFS
Investment Advisor

Robert T. Martin, CFA, CFP®
Investment Advisor

This article is for informational and educational purposes only and should not be relied upon as the basis for an investment decision. Consult your financial adviser, as well as your tax and/or legal advisers, regarding your personal circumstances before making investment decisions.

This article was originally published in NJ Lifestyle’s Summer 2017 issue.

Photo by Joshua K. Jackson on Unsplash

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