The first half of 2017 brought predominantly positive returns for all markets and our portfolios. In the U.S. strong equity markets saw earnings improve dramatically not only in the first quarter, but all indications are the second quarter as well. Overseas earnings improved even more as developed and emerging economies continued to grow. After five years of neglect international stocks are finally in the sweet spot because they are producing strong earnings growth from a low valuation starting point.
Some would say that 2017 has been a goldilocks year so far with stocks and bonds up amid record low volatility. One looming concern is a disconnect on monetary policy, with the Fed penciling in seven more rate hikes in the next two years versus the market’s expectation for one or two. So far, the rate hikes have not had material effect on the U.S. equity markets even though the yield curve (spread between the 3-month and the 10-year treasury yields) has been flattening (a sign of a potential recession). If the flattening were due to a deteriorating growth outlook it would likely be detrimental to stocks, but most of the fall in longer term yields appears to be lower inflation (a positive for stocks).
So, are risks growing or will the current bull market last through the second half of 2017 and longer? According to Strategic Research it has been 268 trading days since the last 5% pullback, the fourth longest streak since 1950. Despite political bumbling and geopolitical tensions, the bull market continues to proceed ahead largely ignoring the noise around it. The possibility of a correction in the second half is probably greater than it was in the beginning of the year. Any combination of the Fed raising rates too quickly and earnings growth slowing would have an impact as valuations have risen in an era of artificially low interest rates.
With global GDP (Gross Domestic Product) currently at 3.6% (vs. 2.1% for the U.S.), for the first time in many years we have a global expansion fueling stock prices. This is dramatic as the last few years have seen the U.S. be the primary engine for global growth. This is also positive because it allows for better diversification and more opportunities for gain.