“And the beat goes on…” US Stock Market indexes continued to march to record highs in the 2nd quarter of 2017. Bond values held steady or showed small gains as long-term interest rates for mortgages, Treasuries and corporate bonds remained near historically low levels. And over the past 12 months, Foreign Stock have joined the party, with broad averages for Developed and Emerging Market countries outperforming the S&P 500 index.
The recent period of steadily rising US stock markets has occurred with remarkably low price volatility. The CBOE Volatility Index (VIX), known as the “fear index”, has been near lows last seen in 1993. While we worry about investors being overly complacent, there are some fundamental factors supporting the market’s momentum. Many economists have a favorable outlook for global economic growth. 2017 could see the first synchronized expansion since the 2008 mortgage crisis with GDP growth improving in Europe, the US and many Emerging Market countries. Over the long-term, stock prices follow corporate earnings and earnings are expected to increase by more than 10% for all of 2017.
Showing confidence in the US economy, the Federal Reserve Bank has raised the Fed Funds rate 3 times since December 2016 to a target rate of 1-1.25% as of June 15. Fed Chairwoman Janet Yellen has recently indicated that further rate increases will be gradual, with the Fed Funds target rate not much higher than the current rate and lower than the target before the 2008 mortgage crisis. Perhaps more importantly, the Federal Reserve Bank has stated it will start to reduce its balance sheet starting later this year. We will watch closely to see how the Bond Market reacts and if long-term rates start to increase.
Outside the US, central banks are signaling that they are planning to follow the US Federal Reserve Bank’s lead. As economic growth improves, short-term interest rates in Europe have started to rise. Foreign stock market fundamentals look more attractive than US stocks’, with lower P/E ratios and higher dividend payouts on average. We believe the typical US investor is underweight Foreign and Emerging Market investments and the flow of funds toward those asset classes is likely to increase, potentially boosting the performance of non-US assets.
Many investors continue to focus on the political situation in Washington, DC. The controversies reported daily by the news media create the opportunity for positive surprises. One such surprise is the annual “stress tests” for our “too big to fail” banks. For the 3rd consecutive year all 34 large banks passed the stress tests. This record now allows them to boost dividend payments to their shareholders.
We want to stress that, as always, many market risks exist and we will not become complacent in our investment management activities. For many of us, taking some profits on US Stocks and re-allocating to other asset categories is warranted at this time.
The advisors of Canby Financial Advisors, LLC, (CFA) located at 161 Worcester Road, Suite 408, Framingham offer securities as Registered Representatives of Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser. Advisory services offered by Canby Financial Advisors, LLC, a Registered Investment Adviser, are separate and unrelated to Commonwealth. CFA can be reached at 508-598-1082 or www.canbyfinancial.com.
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