Association Retirement Plan: 2nd Quarter Market Commentary
July 31, 2017
Second Quarter 2017 Market Commentary
Market Summary: Thankfully the stock market has forward-looking tendencies, as the prospect of double-digit growth in corporate profits easily overshadowed an increasingly partisan political climate in the second quarter. S&P 500 stocks gained 3.1% during the period, bringing the S&P 500’s return for the year to 9.3%. As the prospects for inflationary U.S. fiscal policies receded, so did interest rates during the quarter, creating a favorable environment for bondholders. As a result, the Barclays Government/Credit Index, a popular bond benchmark, delivered a 1.7% total return for the quarter and 2.7% for the year.
Economic Forecast: The U.S. economy posted another in a series of first quarter GDP disappointments, in this case an anemic growth rate of only 1.4%. The biggest positive for the U.S. economy, however, is the employment situation, and June’s report easily outpaced the healthy 180k monthly gains to which we have become accustomed. Accordingly, the outlook for the second half of the year is typical of the pattern it has followed since the crisis – growth of around 2.5%.
Fixed Income Strategy: One of the key determinants of interest rates is expected inflation. As has been the case since the 2008 crisis, there is very little inflation to be found. Looking ahead, we do not see a risk of an inflation outbreak - even with an unemployment rate of only 4.4%. Though prices should remain in check, interest rates should still rise gradually in the future, but bottom line, we do not foresee a spike in yields.
Equity Strategy: The influence of the largest technology stocks (i.e. FANG) is still outsized. Apple, Alphabet, Microsoft, Amazon and Facebook are in order the five most valuable companies in the S&P 500. Together they comprise over 13% of the index’s capitalization and 14% of its profits. As a whole they are up over 20% for the first half of the year, and in all probability any active manager not weighted in the names lagged the cap-weighted S&P 500 Index. We have full exposure to the group, and when combined with other successful selections the result is handsome equity performance for the year.
Technology has long been our favorite sectors, but valuations have stretched and exposure has been reduced a notch. We are redeploying to the industrial sector, where the atmosphere has improved significantly since the global rebound and corresponding 7% decline in the dollar this year. Healthcare continues to be attractive, particularly since policy risk has abated along with the odds for repeal and replacement of the ACA. Our least favored sectors are telecom, utilities and real estate - all sensitive to rising interest rates.
Asset Allocation: Stocks have delivered a good year’s worth of performance in only six months. Earnings are growing, but ultimately we will continue to over-weight stocks because bond yields still remain very low.
(Please visit the Retirement section of the SCSFA website for more detailed information)
Back to Firewire
Next Post
Store