Market Currents

• Mid-Year Report. The equity markets continued to perform well this year, posting several new highs during the period.  Bond markets, too, have been steady, with rates gently falling through most of the first half.

• Synchronized Global Growth. Equity performance in the first half was led by international stocks.  A big part of the reason is that the global economy is in the midst of perhaps its most steady, synchronized expansion in several years.  With foreign valuations still attractive following years of slack results, we suspect overseas equities may have continued room to rise.

• Post-Election Enthusiasm Fades.  Initial optimism about the Trump agenda has faded in light of slow legislative progress.  Despite the one-party rule, President Trump and the Republicans are struggling to pass health care reform packages in Congress.  “Savings” from the health care reform are expected to offset a business and personal tax cut package.  With the latest missteps, we believe expectations for a significant tax reform are being scaled back significantly.

• Strong Corporate Earnings. Earnings momentum has been strong against a positive economic backdrop.  Management outlooks are generally optimistic, revenue growth is encouraging, and margins remain plump despite higher wages.  Based on initial expectations, we may be in line for a second consecutive quarter of double-digit earnings growth.

• Interest Rates Depressed. Despite several interest-rate hikes from the Federal Reserve, yields on longer-term government bonds remain low, both in the U.S. and abroad, and are likely to increase only modestly in the near-term.

• Volatility in Tech Stocks. After a prolonged period of outperformance, technology stocks saw some price weakness late in the quarter.  Notably, the money is flowing into other sectors of the equity markets – specifically financials and health care – as opposed to seeking safer grounds.  We think the softness is largely a result of healthy profit taking, and should not be interpreted as a sign of a market top.

• Reasons for Optimism. We think markets around the globe can grind higher, with the continued “green shoots” of growth overseas, and with low interest rates everywhere.  A corporate-friendly administration may continue to push for favorable regulatory and policy changes.  Valuations are leaning on the higher side, but we believe they can be sustained, and even climb further, especially if corporate profits and earnings continue to rise.