Monthly Market Insights by Bryan Bourgeois - July 2017

The markets delivered quite a strong and stable performance for the first half of 2017, with the S&P 500 up 9.34%.  While US markets continued to improve, markets overseas have performed even better.  International markets are up almost 15% year-to-date and the emerging markets (C) are up over 15%.  The Barclays Aggregate Bond Index is also up 2.27% on the year, even as the Fed hiked rates twice this year.

S&P 500

All-World Ex-U.S. 

Emerging Markets 

While the political front remains combative, nothing has erupted to destabilize the markets.  The US is in the midst of a battle over healthcare and tax reform as well as the administration dealing with accusations of “collusion” with Russia.  Europe is still reeling from a series of terrorist attacks in the U.K., as well as sparing over Brexit negotiations and dealing with a debilitating refugee crisis.  Finally, North Korea’s continues to increase its status as a rogue state by continuing its program of launching transcontinental nuclear warheads.   That being said, not only have the U.S. and international markets been comparatively devoid of turbulence, they are exceedingly surpassing previous growth expectations and continue to show signs of further improvement.  Within the United States, as well as globally, nearly all leading economic indicators show healthy signs of economic growth.

Leading Economic Indicators for the U.S.

The confidence of corporate America also continues to rise, primarily due to the ease of demands from job-killing regulations, which is enabling companies to concentrate on development, innovation and growth instead of being burdened by over-regulation as we have seen over the last couple of decades, especially the last administration.  As a result, while we are still quite late in a lengthy economic growth cycle, the expansion seems to be strengthening instead of evaporating.  Atlanta’s Fed is predicting a 2.6% growth rate for Q2.     Jobless claims for the third week of June came in at 238,000, marking two years which claims have stayed below 300,000.  This stretch in lack of jobless claims hasn’t happened since 1970.

Jobless claims 

The Fed hiked rates to 1.00 – 1.25% in their June meeting, which is the second hike this year following the hike in March from 0.75% – 1.00%.  The absence of a negative effect from these hikes on the market reinforces investor’s optimism on the economy.  The CME Group expects the next likely fed rate to be in December 2017, current at 45.2% chance of a 1.25% – 1.50% rate.

Effective Funds Rate

Outside the United States, Europe is notching growth that is solid, and indicators ranging from borrowing to Purchasers Managers Indices are positive, signaling more good news to likely come out of the Eurozone. With the election of Emmanuel Macron as President of France, the fear of Europe sidestepping away from capitalism and open markets has ended.  Furthermore, the threat that the EU departure of Britain would be emulated by other countries has for the most part evaporated.  Besides Macron’s win helping unite the European Union, Mr. Macron is trying to retool over 3,000 pages of labor regulations broadly blamed for reduced labor and France’s slow-growth economy.  With the positive prospects for the Eurozone, European equities are finally heading higher, up over 13 percent in the first half of this year, after having been in a slump since 2014.

European Equities 

China is currently stabilizing, contributing to the speed of expansion for Asia.  The latest GDP out of China was 6.9%, reaching its highest level from the third quarter of 2015.  China continues to evolve from an export-driven manufacturing economy towards a domestically-driven service-based economy. This transformation will hit some speed bumps that may be substantial, but the transition remains resilient thus far and indicates a hard-landing remains unlikely, at least for the foreseeable future.

Chinese Equities

As China’s economy improves, further south in India, major government reforms are underway led by Narendra Modi, India’s Prime Minister, who is determined to reform the country’s complex and arcane tax system.  These aggressive and recently successful economic and financial reforms have coincided with Mr. Modi’s fallout from the crackdown last November on the black market, which voided close to 90% of country’s cash and caused growth to stall.  However, while painful over the past year, these reforms are likely to provide the frameworks of sustainable growth in the future.

Indian Equities

The continuing global expansion, which is the strongest it has been in a decade, should provide spillover advantages to the US.  For example, multinational corporations should directly benefit global growth along with the currently soft US Dollar.  The global expansion also gives the Fed more flexibility as it attempts to wind down its $4.5 trillion balance sheet generated as part of their colossal stimulation effort during the fiscal crisis.

Fed’s Balance Sheet

Economic prospects are positive as we head into the next half of this year. The political environment in the US as well as in Europe may remain combative and will continue to warrant attention, yet typical risk indicators remain below historic averages.  The current mix of pro-growth policies, ample liquidity and future growth expectations have pushed equity valuations up leaving less room for future long-term growth at these levels.  However, prices may be justified if Trump can deliver on expectations concerning healthcare and tax reform.  A shift or failure to deliver on market expectations may propel markets in a different direction.  Equity markets rise like stairs and fall like elevators, so it’s important to not become complacent and keep a close eye on current investment opportunities and risks.

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