We hope our newsletter finds you and your family doing well. We are reaching out to you today to give you an overview on the markets, as well as our thinking as we move into the second half of the year.
Equity markets have had a good start to 2017, extending the strong performance from the end of last year. This is quite the shift if we look back just one year ago, when caution was at the forefront of everyone’s mind. Post-election, we experienced a drastic pendulum shift when market sentiment moved toward high levels of euphoria, and this has for the most part remained throughout 2017. Neither of these extremes appears justified, and most recently we have seen the market take a breather after recording all-time highs in the S&P 500 and tech-heavy NASDAQ Index.
U.S. equity markets are questioning the new administration’s ability to deliver its policy agenda, particularly in light of the recent failure to repeal and replace the Affordable Care Act, which seems to indicate that the Republican majority in Congress is far from united. The outcome of the political wrangling in Washington is likely to remain at the heart of the markets’ focus over the rest of this year. Markets have priced in neither the best nor the worst potential policy outcomes, and so risks remain both to the upside and downside.
Regardless of policy change expectations, earnings and revenue growth within the U.S. have returned in a big way. After an earnings recession that resulted in five consecutive quarters of negative year-over-year earnings growth (mainly driven by the energy sector), things are again looking positive for corporate earnings. Additionally, consumer confidence readings are the highest we have seen in 15 years.
The continued improvement in the U.S. economic situation has been reflected in the Federal Reserve’s policy bias toward tightening monetary policy. This improvement led to a substantial sell-off in government bond markets after the U.S. election in November. After rising roughly 0.6 percentage points, the 10-year Treasury yield has since traded in a narrow range around 2.5%.
Recent statements by the Federal Open Markets Committee members have led us to anticipate two or three 0.25 percentage point rate hikes this year. However, with the continuation of stimulative monetary policy in much of the rest of the world, further increases in the U.S 10-year rates should remain dampened as global investors hunt for yield.
Outside the U.S., confidence in economic outlooks has also been growing, and foreign companies are finally starting to show broad-based earnings growth. This has helped European equities to keep up with the U.S. so far this year and even outperform in many regions. International economic growth has been coming in quite a bit stronger than within the U.S., and we are seeing a large number of companies that are attractively valued.
Last year, we experienced prolonged political turmoil overseas, and after Brexit many predicted the ultimate break-up of the Eurozone. However, in 2017 European elections have rejected anti-Euro politicians, suggesting that the widely predicted dissolution of the Eurozone is probably not as imminent as some believed.
We continue to expect pro-growth legislation to be passed, even if it takes longer and winds up being less comprehensive than originally anticipated. This type of stance favors equities and cyclical stock specifically. We are starting to favor international equity and emerging debt and equities given their improving growth opportunities, yield and attractive valuations. Additionally, fixed income plays a star role in diversifying risk, which remains our main focus.
Thank you for the trust you have placed in us. Your future is of the upmost importance to everyone here at CGC Financial.