The first half of 2017 was marked by historically low volatility (on average) in the financial markets, stable economic activity in the US and improving economic activity globally, continued low inflation and interest rates, and the best 6-month performance for the stock market since 2009.
Since January 1, 2017, the stock market has been slowly grinding higher, interrupted by only 5 small declines, the largest of which was approximately a 3% decline during March and April. Overall the S&P 500 gained 8.3% in the first half of 2017. Perhaps the most telling part of this performance is the stock market’s resilience given the lack of progress on fiscal stimulus from Washington. My view is the market is focusing more on fundamentals (like corporate earnings) and the economy, and less on the Republican agenda of tax cuts and infrastructure spending.
One thing that has me a bit concerned is the bond market. Interest rates, as measured by the US 10yr Treasury, have actually declined since Jan 1, 2017 from 2.45% at the beginning of the year to 2.27% on 6/30/17. This reflects a more tepid outlook for the economy by the bond market. The question is who is right – the stock market or the bond market. Right now I continue to favor the stock market but am keeping a close eye on this divergence.
One of the positives I am seeing is a broad-based improvement in global economic activity. All of the major economies of the globe, and the companies that make them up, are growing at the same time. For the first time in 7 years, all major regions around the globe are generating positive earnings per share (EPS) growth simultaneously. (source: CNBC.com)
So, what does all this mean going forward?
My outlook is that economic activity globally will continue to be solid and stable, which should allow financial markets to continue to generate positive results. It is worth mentioning that, according to industry sources, in the 25 other instances when the stock market for the first half of the year has been up more than 8% (like 2017), the second half return has been strong with an average 7.1% gain and positive returns 84.0% of the time. In other words, strength usually begets strength. (source: Raymond James & Associates)
However, the risk of a yet-undermined catalyst causing disruption in the markets is not insignificant. In the US, the Federal Reserve could change interest rates inappropriately or Washington could fail to make progress on key economic initiatives. Globally, the biggest risks are geo-political disturbances in places like Syria or North Korea.
I remain modestly confident and cautiously optimistic about the balance of the year. I continue to be on the lookout for danger and for opportunities to exploit.
Feel free to call me if you have any questions or concerns.
July Calendar of Events (comments and additions for future months are always welcome)
July is National Picnic and National Parks month – why not go to a national park and have a picnic – a 2 for 1
July 1st Bureau of Internal Revenue (the IRS) founded in 1862– betcha nobody celebrates this birthday
July 4th Independence Day
July 11th My daughter Ryan’s birthday
July 16th My daughter Ryan’s wedding (2 down, 1 to go)
July 29th National Lasagna Day
July 30th International Friendship Day is a day designed to foster friendships and bridge the gaps between race, color, religion
I hope you find this report helpful. Please share it with anyone you feel would benefit from the information.
Sources: Envestnet/PMC, Raymond James & Assoc, CNBC.com
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