Markets in Review

by | Aug 10, 2017 | Institutional Services

Equity markets continued to rise during the quarter, with stocks recording the majority of their gains in late April and May on the back of first quarter earnings, which exceeded expectations. After returning 6.1% during the first quarter of 2017, the S&P 500 advanced 3.1% during the second quarter.

Growth-oriented stocks and sectors continued to outperform their value-oriented counterparts, whilst large-cap equities averaged the highest returns during the quarter. Healthcare, Industrials and Financials were the best performing sectors, returning 7.1%, 4.7% and 4.2% respectively. The worst performing sectors during the quarter were Telecom, which lost 7.0%, and Energy, which fell 6.4% as oil prices fell into bear market territory (over 20% off recent highs).

International stock markets posted solid returns for the second quarter with the MSCI ACWI Ex-US Index returning 5.8% (USD). Stronger economies and reduced political risk after the election of pro-European centrist Emmanuel Macron in France, contributed to market leading performance by European markets, with the MSCI Europe Ex-UK Index returning 8.4% (USD) for the period. Emerging markets were another beneficiary of a supportive global environment, with the MSCI EM Index returning 6.3% (USD) for the quarter. Returns in international investments were boosted in dollar terms as the U.S. dollar fell against most major currencies.

At the June 14, 2017 meeting, the Federal Open Market Committee (“FOMC”) raised base rates by 0.25% and set out comprehensive plans to reduce its balance sheet. The broad fixed income market was up overall during the quarter. Corporate Bonds provided the highest return with the Barclays U.S. Corporate Investment Grade Index at 2.5%. Treasury Inflation Protected Securities (“TIPS”) were the worst performing sector, with the Barclays Real TIPS Index down 0.4% as a result of decreased inflation expectations. The yield curve flattened, as short-term rates increased after the Fed raised the benchmark rate and long-term rates dropped on muted inflation expectations.

Manufacturing activity in the U.S. has picked up over the past year amid strengthening global demand and a weakening U.S. dollar. A steady economic environment contributed to calm market conditions during the previous quarter. In line with the stable economic data, the Federal Open Market Committee (“FOMC”) raised the federal funds target rate to a range of 1.00% – 1.25% at the June 14th meeting. The FOMC maintained their prediction for one more rate hike in 2017, with three more increases anticipated in 2018.

Job growth in the U.S. economy remained strong during the quarter, averaging 194,000 jobs per month. However, despite continued job growth, the unemployment rate experienced a small increase from 4.3% to 4.4%. Furthermore, the labor force participation rate declined slightly, from 63.0% to 62.8%. Although the labor pool is shrinking, contrary to traditional theory, it is not resulting in stronger wage growth.

Headline inflation fell from 2.4% to 1.6%, and Core inflation, which excludes food and energy, fell from 2.0% to 1.7% during the quarter. This fall in inflation rates marks one of the weakest 4-month periods experienced in 60 years-worth of CPI records. CPI increased just 0.1% each month during the quarter.

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