2nd Quarter 2017 Market Review: The silence is deafening

The second quarter of 2017 marked another period of relative calm in the financial markets. Despite any number of potential hotspots, equity prices posted another quarter of solid gains, punctuated only briefly by minor bouts of nervousness.

Indeed, the lack of volatility in global stock markets has some analysts worried that an overabundance of complacency has set in. As of the end of the second quarter, the S&P 500 Stock Index had gone 247 trading days without a dip of 5% or more, the longest stretch in 20 years1! In the second quarter, the S&P 500 endured only one day of more than a 1% drop and only one day of a 1% or more gain2. The index posted positive returns in all six months of 2017, only the sixth time since 1928 this has occurred3.

The S&P ended the quarter up 3.1% and 9.3% for the first half (total return). The pattern was much the same in overseas equity markets. Helped by a weaker dollar, developed international equities continued to outpace the US equity market, gaining 6.1% in Q2 and 13.8% YTD. Emerging market equities gained 6.3% in the second quarter, bringing the first half return to a robust 18.4%. The outperformance of international equities continued a pattern that began in the first quarter, after a multi-year period of underperformance relative to US stocks.

Despite another short-term rate hike by the Fed in June, long-term US interest rates remain subdued. The yield on the 10-year US Treasury note declined slightly in the second quarter, resulting in gains for bonds, especially in the longer maturities. The Barclays Aggregate Bond Index rose 1.5% in the second quarter, bringing its first-half gain to 2.3%.

Concerns about oversupply led to significant weakness in oil prices, which led to declines in our energy MLP holdings.  Domestic real estate securities posted small gains, while international real estate performed quite well, aided by the weakening dollar.

Global Equities and Headlines Chart

Outlook and Strategy

The current bull market in US stocks that began in March 2009 has lasted 99 months, almost double the average length going back to the Depression. According to JP Morgan, the S&P 500 has returned 258% in this bull market, vs. an average of 156%.

Should investors be concerned about the length of this run and the lack of excitement in the financial markets? In our view, bull markets do not die of old age alone. The lack of volatility is certainly something to pay attention to, but not a bearish signal in and of itself.

History demonstrates that bear markets are usually presaged by several of the following three factors: (1) an economic recession; (2) a spike in commodity prices; and/or (3) aggressive action by the Fed to raise interest rates. The magnitude of the decline is usually exacerbated by high valuations at its onset. Although stock market valuations are high, none of the other three factors are currently indicating caution.

Equity prices are being sustained by low interest rates, low inflation, steady but uninspiring economic growth, and a notable increase in corporate earnings. Although lofty expectations for a meaningful increase in US GDP growth have dissipated, investors remain optimistic about the earnings outlook and the potential for a pickup in growth in the awakening European economies. Our base case is for equity prices to continue to move higher, although at a much slower pace than in the first half of the year and accompanied by more significant bouts of volatility.

Index Returns through June 30 chart

We recently reduced our recommended global equity allocation to neutral, believing that risks for a moderate correction have increased. Despite better valuations in European stocks, we remain modestly underweighted there, preferring the stability of the US economy and the faster growth prospect of emerging Asian markets. Unless economic conditions meaningfully deteriorate, we would expect to use any weakness in stock prices as an opportunity to add to positions. Our view is that long-term investors will be rewarded by owning equities relative to other asset classes, despite a number of near-term concerns that could upend the current complacency.

1,2,3 Source: Ned Davis Research.

Learn more about Bruce D. Simon.


This report is the confidential work product of Ballentine Partners.  Unauthorized distribution of this material is strictly prohibited.

The information in this report is deemed to be reliable but has not been independently verified. Some of the conclusions in this report are intended to be generalizations.  The specific circumstances of an individual’s situation may require advice that is different from that reflected in this report.  Furthermore, the advice reflected in this report is based on our opinion, and our opinion may change as new information becomes available.

Nothing in this presentation should be construed as an offer to sell or a solicitation of an offer to buy any securities. You should read the prospectus or offering memo before making any investment.  You are solely responsible for any decision to invest in a private offering.

The investment recommendations contained in this document may not prove to be profitable, and the actual performance of any investment may not be as favorable as the expectations that are expressed in this document.  There is no guarantee that the past performance of any investment will continue in the future.

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