Second Quarter 2017 Update

July 28, 2017

Key Points

• The global economic environment continues to improve, supported by low energy prices and elevated consumer confidence
• Equity markets delivered robust gains in the quarter, extending the rally that began just after last November’s presidential election
• Enthusiasm about the prospect of the Trump administration passing certain policies seems to have waned somewhat as a result of Washington’s political climate
• Equities face the likelihood of increased volatility over the near term

2nd Quarter Market Commentary

The US economy continues to generate solid and stable growth, and the expansion is now eight years old, making it the third-longest on record. In addition to the economy nearing full-employment levels, the broad-based and steady growth is supported by low energy prices, elevated consumer confidence, and stock prices hovering near record highs.

While enthusiasm about the prospect of the Trump administration passing certain policies seems to have waned somewhat as a result of Washington’s political climate, consumers and investors, nevertheless, have forged ahead. The Bureau of Economic Analysis reported its third estimate of first quarter 2017 gross domestic product (GDP) of +1.4%, up slightly from the prior estimate, but lower than the fourth quarter’s +2.1% reading. The Federal Open Market Committee (FOMC) voted at its June meeting to raise short-term interest rates by 25 basis points to 1.00% – 1.25%. Analysts anticipate at least one more rate hike in 2017, as well as the Federal Reserve (Fed) beginning its long anticipated reduction of its balance sheet.

The global economic environment also continues to improve, with most regions of the world on track to deliver robust growth in 2017. The Eurozone economy grew at a 2% annual clip in the first quarter, an improvement from prior quarters. Recent data from the various economic segments has exceeded forecasts, an encouraging sign for future prospects. In addition, the outcomes of the French and Dutch elections have eased uncertainty in the region. China’s economy is expected to grow close to its potential in 2017.

Below, we’ve highlighted broader market returns for the 2nd quarter and year-to-date time periods:

Source: Thomson Reuters, Envestnet

Equities

Equity markets delivered robust gains in the quarter, extending the rally that began just after last November’s presidential election. Gains were fueled by a mixture of a solid and stable domestic economy; a material recovery in European economies; clarity on the interest rate front; and continued investor optimism regarding the potential results of the Trump administration’s policies.

As in the first quarter, international stocks generally outperformed US equities overall. European economies have begun to show signs of rebounding, and investors have greater confidence following the results of the French and Dutch elections. Even though China continues to go through structural reforms, its economy is expected to grow at potential this year, in part due to the new cycle of mobile phones that will be produced and delivered in the second half.

Fixed Income

Fixed income securities, on balance, generated positive total returns in all market segments. The Bloomberg Barclays U.S. Corporate 5-10 Yr. Index advanced +2.2% during the three months. Municipals also fared well, as the Bloomberg Barclays Municipal Bond Index rose by +2.0% during the quarter.  However, bonds suffered steep losses in the last week of the quarter, as investors realized that the combination of rate hikes and balance sheet reduction may mean that the long period of extremely accommodative monetary policy is ending.

Summary

The US economic expansion is now eight years old, and is the third-longest on record, trailing only the expansions of the 1960s and 1990s. Because of the economy’s currently stable underlying fundamentals and the lack of apparent speculative excesses, many economists believe that the prospects are good that the current expansion will eventually surpass the others in terms of duration.

One of the benefits of having a steadily growing economy is declining equity market volatility over the past several years. However, a growing chorus of analysts cautions that with volatility near historic lows and valuations higher than long-term averages (although certainly not at bubble-like levels), the risk of an as-yet-undetermined event causing disruption in the market is not insignificant. The catalyst of heightened volatility and a decline in stock prices could be any number of events, including continued declining bonds experienced in the last week of the quarter; a FOMC policy misstep; Congress’s failure to make progress on its key initiatives of healthcare overhaul and tax reform; legal entanglements resulting from the work of the special counsel investigating Russia’s efforts to disrupt US elections; or geopolitical eruption in some area, such as North Korea or Syria.

Although investors have good reason to be modestly confident and cautiously optimistic, markets are likely to exhibit greater volatility over the next few quarters compared to prior quarters.

Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.

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