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Quarterly Market Commentary Q2 2017

Quarterly Economy

Second Quarter 2017

Markets in Review
The US stock markets continued advancing in the 2nd quarter of 2017 as corporate earnings growth, consumer confidence, business confidence, the Fed and employment numbers all continued pushing the markets to new highs. For the quarter ending June 30, 2017, the S&P 500 was up 3.09%, the DJIA gained 3.95% and NASDAQ climbed 4.16%.

Year-to-date, the numbers were even better. The DJIA and the S&P 500 are neck-and-neck, both rising about 9.35% (the DJIA was actually up 9.34%) and NASDAQ was up an impressive 14.71%.

But the US Markets Did Not Lead the World
As impressive as US stock market returns were for investors, markets outside the US did even better, driven in part by a falling US dollar. Returns around the globe were positive in the second quarter, as emerging markets and international developed markets outpaced the US handily.

World Stock Market Returns (Local Currency)
World Stock Market Returns !!!! Source: FactSet, MSCI, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. > All indices are total return in local currency. Data as of 30 June 2017.

Asset Classes Were Consistent
The US markets rode the technology wave through most of 2017, taking a brief pause in early June. As such, it’s not surprising that Growth stocks crushed Value stocks for the second quarter and so far this year. Commodities, on the other hand, had a tough second quarter and 2017, driven mostly by the drop in oil prices, which officially crossed into bear market territory earlier in June.

Asset Class & Style Returns (Local Currency)
Asset Class & Style Returns
!!!! Source: Barclays, Bloomberg, FactSet, MSCI, J.P. Morgan Asset Management. REITs: FTSE NAREIT All REITs; Cmdty: Bloomberg UBS Commodity Index; Global Agg: Barclays Global Aggregate; Growth: MSCI World Growth; Value: MSCI World Value; Small cap: MSC World Small Cap. All indices are total return in local currency. Data as of 30 June 2017.

The Fed Was Busy
The Fed has raised short-term rates three times since the end of 2015 and expectations are that rate raising will continue in a measured way. Last week, the market digested the minutes from the recent Fed meeting, which outlined the next tool the Fed uses to manage economic growth – paring back its balance sheet. Besides the ability to raise/reduce short-term rates, the Fed has a $4.5 trillion balance sheet and they intend to reduce this amount over the next few years, which will also have the effect of allowing longer-term rates to rise gradually.

The minutes of the June Federal Open Market Committee meeting show that some of its members want to begin reducing the Fed’s $4.5 trillion balance sheet as early as September.

Economic Data Supports Growth
The economic data fully supports the bull market, by some accounts now entering its 8th year. Sure, there are political and social headlines dominating the news, but corporate earnings are strong, unemployment is low, interest rates are stable, inflation is tame and consumers are confident – all supporting reasons why the markets keep hitting new highs. Let’s look at consumer and small business confidence – both of which remain very high.

Consumer confidence is high
Consumer confidence !!!! Source: FactSet, Conference Board. As of July 3, 2017.

Small business confidence is high
Small business confidence !!!! Source: FactSet, Natl. Federation of Independent Business. As of July 3, 2017.

Employment – Not Too Hot, Not Too Cold
The US Bureau of Labor Statistics released the Employment Report for the month of June and showed that employment increased in health care, social assistance, financial activities, and mining. More specifically, the Report showed the addition of 222,000 nonfarm payrolls, which was significantly higher than estimates of about 173,000. The Report was largely seen as another “Goldilocks Report,” pointing to a job market that is sustaining a modestly-growing economy without much fear of inflation.

Those 222,000 new jobs added in June bring the 2017 monthly average to 180,000 – another positive indicator for the economy. It’s true that the unemployment rate inched up from a 16-year low to 4.4%, but only because more individuals are returning to the work force, which is a good thing.

June's Report also showed that wages are rising at a 2.5% rate, higher than the average of 2.0% from the 2010-2015 time-period. Finally, the Report showed upward revisions to April and May payrolls of another 47,000 jobs to the numbers reported earlier in the year.

So, What’s Next?
By most accounts, the environment for US and global stocks remains in good shape, especially with the next round of corporate earnings widely expected to be better across the board vs. the previous quarter. But as always, the possibility of a pullback exists, especially as this bull market is getting a bit long-in-the-tooth.

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